[Dan]

EURUSD has gone through about 7 months of sharp swings in both directions and sits poised just under the halfway point of those ranges.(ranges are 1.2329-1.4720 which makes the halfway point 1.3525)

The stop/start nature of a lot of moves recently has led to much shorter term trading and an almost lack of belief that a trending move will materialize. There has been more of a downside bias than topside bias in the market. That has been based on a host of dynamics since last November including:

• The deterioration in the European economic picture
• Concerns about the European banks
• Concerns about Eastern Europe
• Concerns about Russia
• Concerns about the Eurozone and possible break up (Ireland, Spain Greece economic stress etc)
• Concern about German trade
• Increased easing by ECB
• Some sort of QE by ECB
• 1% ECB level no longer sacrosanct etc etc.

The reality is that we have had all that and not only has EURUSD not scrambled down to 1.20, 1.15 1.10 and even parity as some people thought and now it sits in the mid point of a choppy range.

If all that does not send it down…..IT IS NOT GOING DOWN.

On the other side of the equation is the U.S.

• Interest rates have been taken effectively to ZERO
• Fiscal stimulus has been pushed into the system
• Money supply has exploded
• The Fed’s balance sheet has exploded
• The national debt is about 11 trillion and growing
• Treasury issuance is exploding
• The budget situation is likely to deteriorate on both the fiscal commitments and the likely stress on tax revenues from a sluggish economy and little in terms of capital gains.
• The housing market remains in the doldrums and despite the recent bounce the S&P still stands about 40% off its highs meaning that wealth destruction from the dual asset markets remains huge.
• Long-end yields are moving up
• The Oil price is catching a bid

The demand for U.S. dollars that was evident in the financial deleveraging has likely now run its course with the final announcements yesterday establishing a “ring-fencing” of the major financial institutions going forward.

This leaves us now firmly in the throes of the “economic deleveraging” which some continue to believe will drag on for some time to come. The hype about “economic green shoots” leaves us cold and smacks of the March-June period last year when the same was been said about housing and financial institutions.

The U.K, the U.S. and the Eurozone have all spotted the “green shoots” at the same time. (Spotted them or smoking them?). Far more likely that the technicalities of the math of quarter on quarter numbers will have the cancer patient (U.S. economy) in remission and looking good on the face of it but underneath the surface the patient is still sick.

While we continue to believe this is a bear market rally there is just not enough in terms of building blocks to warrant pushing too hard on that at this point.

However, what we do remain convinced about is that the above dynamic has one very clear implication.

That is that the USD is going to get hit and hit hard in the months ahead.

All the facts argue for significant USD weakness and EURUSD levels of between 1.50 and 1.70

The last 48 hours took us through the final dynamics of event risk (Stress tests, ECB and QE etc) and have now removed any overhang preventing this trending move developing.

As a consequence we are getting very close to seeing the start of that trending move higher.

What maybe the triggers?

Technically the chart below looks poised


• EURUSD close below the 200-day moving average at 1.5225 on 8th August 2008 and subsequently fell to 1.2329 by 28th October as financial deleveraging kicked in.

• It re-tested it at 1.4711 on 18th December but failed to close above and fell to 1.2457 by 4th March this year.

• Today the 200 day moving average sits at 1.3464, the trend line off the 1.6040 and 1.4720 highs stands at 1.3530 and the 76.4% pullback of the move down recently from 1.3739 stands at 1.3537. Interesting that the convergence of all these level is right at that 1.3525 mid point mentioned above.

• A move through this range on a closing basis would suggest a re-test of the 1.3739 high and above here 1.4720 comes into play again.