- The switchback market

- Philadelphia and the currency market

- Belgium leads the way

The euro and the dollar traversed the bulk of their recent range this week, moving from a low of 1.4613 to almost 1.4900 but came no closer to escaping the trap that has held the pair since mid November of last year. Except for a two week dip below 1.4600 in December and briefer drops in January and February the currency pair has spent seventy five percent of this period trading between 1.4600 and 1.4900. What will it take for a break out?

The old assumptions, old meaning since last August, a weak perhaps recessionary US economy and a rate easing Fed opposed to an economically steady Eurozone isolated from American problems and backed by inflation fighting ECB, are stale but they are still with us. They are incapable of driving the euro any higher or the dollar any lower. The Fed has erased 225 basis points from its funds target rate; the US economy is barely expanding with perhaps worse times ahead; the Eurozone economy has shown few concrete signs of weakness and the one important change, the ECB adoption of a neutral bias, was immediately and deliberately neutered by its own spokesman. The euro and the dollar have traveled back and forth over the same ground for three months because the essential rate and economic situation has not changed.

To paraphrase John Maynard Keynes, When the facts change sir, I will change my mind.. The problem for the currency markets is the facts have not yet changed.

The biggest boost to the euro this week was given by a minor US statistic, the Philadelphia Fed Survey. This is not normally a market moving item, not even on Rittenhouse Square in Philadelphia. That it was, nevertheless, the occasion, or excuse for the largest single hour rise in the euro shows how desperate traders are for news to break the stalemate between the euro and the dollar. One thing seems certain traders will take not the euro to new highs based solely on poor US results but they will require positive Eurozone returns as well.

Even an American recession is unlikely to push the euro far beyond it old peak against the US currency unless there is evidence that the Eurozone economy will not follow America down. The euro recovery this week was not really a vote of confidence in the united currency or for the economic prospects of the Eurozone. Traders have simply pushed the equation between the euro and the dollar back to its midpoint. As the dollar was unable to push higher in the aftermath of the ECB bias adjustment because the US economy has not yet given proof that it has reached bottom, so now the euro now is unlikely to prolong its three day run to reach new highs because there is scant evidence that Europe will avoid a slowdown in turn. It will take far stronger signs of European resilience than we have seen or are likely to see, to push the euro above 1.5000 against the dollar. If the economic information is indecisive so is the market.

Friday gave another indication of the traders' mindset when the Belgium business survey showed unexpected strength in February and the market bought the euro. This small northern European country is, at least for this survey and because of the difficulty of obtaining EMU wide results, occasionally used as an imperfect proxy for the entire Eurozone. The EMU Services Purchasing Managers Index for February also gave a small boost to the euro when it came in two points above forecast.

But the Belgium survey and the services PMI are weak reeds with which to weave a story of European economic prowess. While the services PMI did have an unexpected recovery, manufacturing PMI dropped half a point and the three month average for the composite PMI (services and manufacturing) was at a two and a half year low. With EMU economic sentiment and ZEW indices at their lowest levels in more than 18 months and predicted to drop further in February, with similar dismal results coming from Germany, with Eurozone GDP growth halving from the third to the fourth quarter, with an EMU current account swinging red in December, and retail sales negative in Germany and in the EMU, a euro recovery based on Belgium and services PMI was too much too soon.

Central Banks

Federal Reserve

The minutes of the January 29th - 30th FOMC meeting indicate the governors have reduced GDP estimates for 2008 by 0.5% to a range of 1.3% to 2.0% from their previous 1.8% - 2.5% forecast. Inflation is predicted to remain above the 2.0% target range but there is no chance that this will prevent the Fed from reducing rates at least 25 bps at the March 18th meeting.

European Central Bank

The ECB successfully warned off a rapid depreciation of the euro in the wake of its bias change and with the paucity of statistics this week did not comment further on monetary policy.

Bank of England

The Monetary Policy Committee (MPC) voted 8-1 to cut rates 0.25% at the February meeting noting the balancing of growth risks and inflation dangers. David Blanchflower, the outstanding easy money advocate on the committee, voted for a 0.5% cut, citing the risk of a very sharp [economic] slowdown.


Minutes for the February 5th meeting when the board voted to raise the cash rate by 25 basis points revealed that a more aggressive 50 point increase had been extensively discussed. According to the record, board members were concerned that the inflation situation had deteriorated and that inflation expectations had become dislodged. The discussion, in the words of the minutes was finely balanced with the board choosing the smaller increase in the end. This is an interesting echo of the oft stated ECB concern that inflation expectations remain anchored.