Well, everything’s back to normal now.

..or is it?

It has been an interesting week in the forex market. Following the announcements that Germany, France, Hong Kong and Japan had shaken off the recession tag the U.S. Fed Chairman announced that “the U.S. economy is approaching recovery.”

This came after manufacturing sentiment numbers recorded a rise in the States as well as in Europe where there was a jump in confidence as retail sales have recovered and the decline in output numbers slowed in the U.K.

Today equity markets have rebounded on the news and everyone seems to be patting each other on the back on the basis that the crisis is now over. Well, all that is except the ECB chief Jean-Clause Trichet who icily commented “I am a little bit uneasy when I see that because we have grass shoots here and there, that we are already saying “well after all, we’re close to being back to normal.’ ”

On the flip side to the sudden apparent euphoria we do have to remember that what we have seen is the equivalent of a household having remortgaged the family home, using the funds to pay off the credit cards debts and forgetting that the mortgage repayments are going to double.

Indeed, the last time the market decided that the fact the States was leading the way out of the recession the markets became bullish for the dollar and equity markets suffered due to the expectation of higher interest rates. If you look at the U.K. it would be no surprise to expect the same as the public sector borrowing was announced much higher than expectations.

Very clearly the reactions are inconsistent and still display an uncertain market sentiment.

In the forex market the dollar is most definitely on the back foot and this trend is expected to extend for another 2-4 weeks at least. It probably won’t be particularly direct and the risk is still for a volatile slide, but that does seem to be the basic direction.

Even the yen is becoming a bit stronger and unless 95.25 breaks against the U.S. dollar the yen’s strength here is also expected to continue down to 92.00 this week and even lower thereafter.

I am seeing a convergence of signals suggesting that we are approaching a dollar low so it seems like a useful time to hedge any dollar payments to be made.

Ian Copsey
www.fx-forecaster.com

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