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200799 Resource 128466 128654 128654 1207027395834 1207027395834 Controlled European Morning Update 1st April 2008

Japan suffering a double bubble blow

Releases from Australia:                                                                         Prior     Current March AiG Performance of Manufacturing Index       51.4         51.2 The RBA are due to announce their rate decision  7.25%      7.25%More sluggish data from Australia as manufacturing performance continues to edge lower but still remains above the 50 level which implies a still expanding economy. Even then the component figures are mixed with new orders slipping 3 points but exports expanding by a massive 23 points. AiG outlined the drag provided by higher interest rates and the general concern over the global outlook. This and other recent numbers will have been noted by the RBA which kept rates on hold at today’s meeting. It remains concerned over the elevated level of inflation but also noted the tightening impact of the tighter monetary policy which it felt would contribute to lower inflation over the coming months. Releases from Japan:                                                           Forecast   Actual Q1 Tankan Large Manufacturer’s Index    13.0       11.0 Q1 Tankan Large Manufacturer’s Outlook   9.0         7.0 Q1 Tankan Non-Manufacturing                12.0        12.0 Q1 Tankan Non-Manufacturing Outlook    10.0       13.0 Q1 Tankan Large All Industrial CAPEX   +0.1%     -1.6%      The bigger news for the morning was the BOJ’s Tankan report which was mostly worse than even the negative forecasts and highlights that Japan’s economy is now at risk of failing once again after a second bubble. The 1980’s bubble resulted in 18 years of recession which was reversed by the globalization bubble as the country’s exporters rushed to take advantage of the sudden expansion in demand. With that having collapsed quite dramatically Japan faces a second period of negative growth but also now risks inflation rather than deflation. The most negative aspect was the average decline of -1.6% in CAPEX plans for this year. However, there are other factors that risk the situation deteriorating. Manufacturers have assumed an average Dollar-Yen rate of 109.21 over the year and this looks as if it may come under pressure which will hot forecasts for H2. The size of the downturn in outlook can be likened to previous recessions and with consumers already feeling the pinch of inflation the outlook appears as gloomy as anyone had imagined. Economy Minister Ota expressed her concern over the large fall in CAPEX plans which would deepen the slowdown in the economy threatening employment figures and worsening the already lackluster domestic economy. Already there is talk of the BOJ cutting rates. They may or may not. However, history has shown that at even zero interest rates without demand, domestically or globally, the prospect of any growth is very close to zero. The following economic releases are due today:February German Retail Sales             (MoM)  +0.5% German Retail Sales              (YoY)  - 0.3% Euro-zone Unemployment Rate           7.1% U.S. Construction Spending   (MoM)  - 1.0%March Swiss SVME PMI                                  60.0 Italian Manufacturing PMI (F)               50.2 French Manufacturing PMI (F)               52.0 German Manufacturing PMI (F)             54.9 French Manufacturing PMI (F)               52.0 German Unemployment Rate              7.9% German Unemployment Change         - 45K U.K. Manufacturing PMI                       51.0 U.S. ISM Manufacturing                       47.5 Yesterday proved to be yet another unexciting day with the Dollar largely range bound. Of all the moves, the spike higher to 1.5895 Euro and reversal was probably the most telling for me. It appears to reduce the stronger options to two alternatives – both requiring a degree of pullback lower.The first of the options is that we have seen the first leg higher of a final rally. This would still suggest a correction back down to 1.5655-65 at least and more probably 1.5618 being the 50% retracement of the rally from the 1.5340 low. From that correction a move back above 1.5901 should then be expected but by then we’ll be facing severe bearish divergences in both daily and weekly charts.The alternative is that the correction from the 1.5901 high could last a bit longer and actually imply a decline all the way back down to the 1.5340 low for a second time. Which will it be? If I look at the Pound I am bearish – and would suggest the second option. If I look at the Swissie I probably come to the same conclusion. So for now I’ll concentrate on the downside but we can just be a bit careful at the 1.5618 area and try and match up expectations in other currency pairs. As for Dollar-Yen, it has kept to a very tight range for several days now and keeps me guessing. However, before getting too bullish I still view the 101.23-34 area as key resistance and until that breaks I still feel the downside may well still hold sway… Note important support and resistance areas:         USDJPY        EURUSD       USDCHF       GBPUSD Res:  101.23-34    1.5895-01    1.0060-04    1.9943-50 Res:  100.37-64    1.5821-46    0.9960-95    1.9860-80Spt:    99.00-15    1.5709-34    0.9910-15     1.9781-12 Spt:    98.37-54    1.5618-55    0.9820-46     1.9709-33 9 application/xml false Australia CAPEX currencies Forex FX inflation Japan RBA recession Tankan Want to know more about currency trading? 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