This article is brought to you by:
CONSENSUS

ALTERNATIVE ASSET MANAGEMENT, INC

444 Madison Avenue, 37th Floor, New York, New York

646-840-0385

(March 8, 2002) CURRENCIES: EUROVERSAL?--This year will not be about relative economic strength but rather how much value is offered in financial markets. In this respect the Eurozone wins because equities in particular offer much more attractive valuations. According to this argument positive economic data should offer a greater benefit to the Euro than the dollar.

The dollar also faces greater headwind than the Euro in the shape of its bloated current account deficit. The US may still struggle to fund the current account deficit over the next year even if the US economy manages a burst of strong growth. With M&A moribund, bonds selling off and equity markets not outperforming other markets the US may confront funding problems. Starting a recovery with a current account deficit of 4 per cent of GDP is certainly not an ideal situation.

Concerns remain about persistent imbalances in the US economy. There is a threat that a speedy return to growth is merely storing up problems for the future. None of the structural problems in the US economy have been unwound during its mini-slowdown, savings rates remain far too low, there is a large overhang of private sector debt and the current account is very large.

Technically, the Euro is still in a down channel and could drop to 0.8400 before surging.

JAPANESE YEN--The Japanese Yen surged to its highest levels against the dollar in nearly three months on Thursday, as investors became increasingly convinced the government has opted for a short-term boost to the stock market at the expense of support for exports. The Japanese currency hit an 11-week high of Y126.40 against the dollar in late European trade after the equity benchmark Nikkei 225 average closed at a seven-month high of 11,648.34. The index has risen more than 20 per cent in the last month, helped by stringent restrictions on short-selling of equities introduced on Wednesday. Under the new stock market rules, short-selling, or the sale of borrowed stock in the hope of buying it back at a lower price, is only allowed when the price is rising. Last week, the market regulator penalized foreign securities houses for breaching previous short-selling regulations.

While the government prefers a weak yen to help stem deflation and boost the income of the country's exporters, it desperately needs sharp gains in the stock market as companies head towards the March 31 year-end. Companies' exposure to stock market losses has increased because under new accounting rules, a fall of more than 50 per cent in the value of securities since the financial half-year in September must be booked at market value. Previously, securities were reported at book value, even if the real share price was much lower. Given this, there had been fears that the weak stock market would undermine the capital base of Japanese banks, which are already struggling under the weight of risky and non-performing loans.

Japan's ideal scenario in the run-up to the fiscal year-end this month was a weak yen, to boost the value of dollar assets, and a strong stock market. But the yen's rapid rise may have put paid to these hopes. "The foreign exchange movement right now is too rapid and problematic," said Yasuo Fukuda, chief cabinet secretary thus drawing a line in the sand.

Longer-term we are still bearish on the Japanese Yen, as Japan's fundamental picture shows no sign of improvement. Both the stock market and the yen are being supported by short-term factors, which are unlikely to last beyond the fiscal year-end.

The Japanese Yen futures contract (here the continuous) has broken the downtrend started in November. However, the market should drop to 0.7700 to retest this line.

Jean-Jacques Chenier

www.alterama.com

Hosted by:
CONSENSUS, INC. AND INVESTORS CO-OP
P.O. Box 520526
Independence, MO 64052-0526
816-373-3700
Fax: 816-373-3701
editor@consensus-inc.com