2004 has been a monumental year in the currency markets.

Dollar weakness was the predominant theme as the world's premiere reserve currency slid to a fresh all-time low against the euro, a nine-year low against the Swiss franc and a 12-year low against the British pound. 2004 also marked the beginning of the global tightening cycle, with many central banks raising rates for the first time since reducing them to extremely accommodative levels. The US current account deficit became a primary point of focus, along with increasing pressure on China to revalue the Renminbi. We expect these themes to resonate into 2005, especially the earlier half. However, growth should also become a primary focus as the world monitors the strength of the US economic recovery. EURUSD OUTLOOK Current Economic Conditions Although the euro reached record highs against the dollar this year, the rally in the currency was not driven by positive European economic news. Instead the rise in the unit was primarily fueled by massive bearish sentiment towards the dollar. As the underlying currency for the world's second largest economy, with highly advanced and sophisticated financial markets, the euro enjoyed tremendous benefits from its de facto status as the "anti-dollar." In recent months, several central banks including the Bank of Russia as well as the central banks of various Middle Eastern governments have diversified their reserve assets from dollars to euros lending further status to the euro as an alternative reserve currency. The flight from the dollar has been motivated by two primary factors: the rapidly deteriorating US Current Account deficit and continuous geo-political tensions in Iraq, which represent both political risk and a mounting economic cost. As a result, investors and speculators flocked to the euro pushing the currency beyond the 1.3400 level for the first time in its existence. However, the present Euro-zone economic situation is hardly bullish. Unemployment in Germany, the region's largest economy stands at 10.8% - the highest level since 1998 - while overall GDP growth for the region stands at an anemic 0.3% compared to much higher 3.3% rate in the US. High unemployment, along with sharply higher energy costs has curbed consumer demand in the Euro-zone while exports - Europe's main engine of growth - have been hurt by the relentlessly appreciating euro. United States, on the other hand, generated a steady, solid economic performance in 2004. The unemployment rate declined to 5.4% while monthly job growth averaged 150K jobs for the last 3 month running. Additionally, Personal Income increased by a healthy 0.6% for the latest period indicating that record US corporate profits are finally trickling down into employee paychecks and should eventually translate into additional consumer spending.

Monetary Policy Outlook As 2005 progresses US and EU monetary policies will likely diverge dramatically. For most of 2004, the ECB practiced a restrictive monetary policy adhering to its mandate of price stability. To that end, ECB was more concerned with inflationary pressures rather then recessionary risks preferring to err on the side of caution. At the start of 2004, in contrast to the ECB, the Fed still pursued an accommodative monetary policy intended to combat the last vestiges of recession in the economy caused by the post -9/11 and stock market bubble shocks. However, by the middle of the year, as it became clear that the US economy reestablished its strength, registering growth above 3% for 3 quarters in a row, the Fed commenced a tightening cycle raising the Fed funds rate from 1.00% in June to 2.25% in December. Most analysts expect the Fed to continue this policy well into 2005 until the fed funds reaches 3.25% or 4%, which is estimated to be the "neutral" rate, whereby it does not promote growth or inflation. With PPI running at year over year pace of 5%, while the Current Account gap grows to an alarming 6% of the GDP, the Fed has little choice but to follow this path of higher rates to temper inflation and reign in the Current Account deficit. The ECB on the other hand faces a host of different problems. Although the Euro-zone consistently generates a Current Account surplus, growth in the region slowed to nearly 0% while unemployment remained essentially unchanged at 9.9% for all of 2004. At the same time the rising euro has kept inflation in check, helping to offset some of the rise in oil costs. An appreciating currency has curbed inflation in the Euro-zone to such an extent that inflation indexes of most members are still recording values close to the ECB target of 2% despite the rise in energy costs. The muted state of inflation provides the ECB some flexibility in 2005. While some traders have speculated that the ECB will engage in physical intervention should the euro breach the 1.40 barrier, other analysts suggested that a cut in the ECB fed funds rate would be a much more effective policy alternative. By lowering it's short term yields, the ECB would not only trigger a decline in its currency, but - by lowering the cost of capital - may stimulate domestic demand, which should help to rev up the tepid rate of growth in the Eurozone.

2005 Implications Can the euro maintain its rise against the dollar in 2005 despite weak economic results? To a large extent, the answer to that question will depend far more on dollar fundamentals rather than the Euro-zone's economic performance. If the US can curb or at least stem the rise of its ever-escalating deficits, the dollar should regain some of its strength against the euro. With the Fed focused on hiking interest rates until the fed funds rate reaches the 3.50% level sometime in 2005, the dollar should enjoy a material carry trade advantage over the euro, which presently yields 2%. If US exports can expand market share then the US Current account deficit could indeed stabilize and begin to recede while the Capital Account spurred on by the interest rate differential would increase creating the proper economic environment for dollar appreciation. However, if US growth begins to slow, the Fed may have to halt it rate-tightening program and the dollar will likely continue its slide. Recent economic data has been of some concern for USD bulls. The latest Non-Farm payrolls figures showed an increase of only 112K against 200K projected while the latest Challenger report noted that US corporations posted 104,530 job cuts in November, which was a 2.6% increase from the previous month and the third consecutive month that layoffs exceeded 100,000. Most recent retail sales numbers have also been disappointing with Wal-Mart registering a paltry 0.7% year over year gains while the Redbook Retail index recorded a fifth consecutive down week of sales. In short, if the US cannot begin to "grow" out of its economic problems in 2005, then the dollar is likely to resume its downward path regardless of Euro-zone fundamentals as investors and speculators will continue to discard dollar denominated assets.

Technical Outlook In 2004, the EURUSD has repeatedly registered fresh all-time highs. Although the rally has stalled as of late, the trend is totally unconcealed. One of the only aspects of the price action that allows the pair to stand-alone from the others is the fact that the ubiquitous break took place in October, nearly 2 months after the JPY and almost four months after the CAD. Also setting the pair apart from the pack, the 100 and 200-day SMA are nearly 800-pips from present pricing making this the largest gap of all the pairs. Daily oscillators have rushed down to parity on the recent move while the weekly scale is heavily overbought. That combines with the respective position to all time highs leads us to favor the retracement or range scenario at these levels in the EUR. Those pondering the strength of the trend and its potential to continue should be weary of the waning ADX, which on the daily is crashing from well above the 40 reading while the weekly time frame reads just barely above 25. However, the overt trend cannot and should not be ignored. Moves to fresh all time highs will more than likely inspire more negative sentiment and perhaps an avalanche to our upper boundaries - reversing the ADX readings. Another piece of evidence supporting the waning trend is the convergence of the weekly MACD from a positive reading. At the moment the weekly histogram is down from a recent peak at .01. Key Levels: Going forward, we have key support at the former all time high of 1.2935/1.3000. Subsequent to that, we have scattered regions of support that could help inspire some range bound price action. On the more heavily scrutinized side of the price, the resistance, as predicated by recent pricing, comes in near the all time highs (1.3500), with a break opening the door to 1.3710/50 level.

USDJPY OUTLOOK Current Economic Conditions

Recent economic data suggests that Japan may be on the verge of tipping into a recession. After taking a brief respite from months of negative surprises by posting better than expected Capital Spending numbers, the Japanese economy resumed the depressing streak of dour data recording worse than anticipated results for Household Spending, Leading Economic Indicators and the TANKAN survey. The latest household spending data showed a decline of -2.0% versus -0.5% expected as Japanese consumer demand contracted for the 2nd consecutive month in a row while the index of Leading Economic Indicators dropped to only 20% out of possible 100%. This was the second month below the critical 50% expansion/contraction line and it bodes badly for the future growth of the Japanese economy. Meanwhile, the latest TANKAN survey of business sentiment registered its first decline in 7 quarters. Clearly, the strong yen is damaging the economic performance of the most export sensitive of the G-3 nations and Japanese authorities are becoming increasingly uncomfortable with the yen rally. The problem is exacerbated by the global slowdown in demand for key Japanese goods such as electronics. Recently, Vice Finance Minister Koichi Hosokawa said Japan, "will act aggressively' on any rapid moves in the yen. Yet up to now no intervention has taken place and yen bulls have been emboldened in their USD/JPY shorts. Many traders believe that the BOJ will not intervene until USD/JPY rate falls below 100. Corporate restructuring and increased trade with Asian partners puts Japanese firms in a less vulnerable position than the year before. This has given the Japanese government a bit more leeway to delay intervention in 2004. Monetary Policy Outlook Although most experts believed that the BOJ would begin to transition away from its ultra-accommodative policy in 2004, the rapid slowdown of the Japanese economy is likely to force the BOJ to maintain its 0% interest rates for the foreseeable future. Despite double digit rise in energy costs, Japan remains quagmired in a deflationary state. Wages have registered 44 consecutive months of declines as Japanese companies continue to hire temporary help in place of permanent workers while other measures of inflation such as Tokyo CPI and Tokyo Condominium Sales continue to record negative year over year comparisons. As GDP growth decreases from the heady 6% pace at the beginning of the year to a much more meager 1.3% rate presently, the BOJ is likely to maintain its dovish monetary posture in order to assure that Japan does not slide into its fourth recession in the last dozen years. Furthermore, we need to see multiple months of positive CPI growth before the BoJ will even contemplate raising rates.

However, the disparity between US and Japanese monetary policies could actually provide some respite for USDJPY in the year ahead. As US interest rates rise and Japan keeps interest rates unchanged, USDJPY will become an increasingly attractive carry trade play. If carry trade plays rebound in popularity in the year ahead, the demand for USDJPY could offset some of the fundamentally based deterioration.

2005 Implications

Japanese authorities are facing a serious policy dilemma. They understand that intervention works only in the short term and are therefore reluctant to drain BOJ assets in a strategy that may have very little long-term payoff. By shifting a large portion of their export trade to inter-Asia markets where transactions are settled in yen, the MOF hoped to avoid the necessity of USD/JPY intervention. However, inter-Asian demand, including China, which is Japan's 2nd largest export market, has cooled recently in response to a general global slowdown caused by much higher energy costs. For Japan, unless US or Chinese growth accelerates, the only path to additional growth is through higher domestic demand. Unfortunately, consumer sentiment in Japan has reached yearly lows as wages and jobs continue their downward spiral. The net result of the current dynamic is that Japanese economic problems may offer a natural floor under the USD/JPY exchange rate. If the country fell into a recession in 2005, it would be hard to envision an appreciating yen against a contracting economic performance, especially so, if the rising currency would further exacerbate economic woes. Certainly in the past few months the USD/JPY relationship was dominated by dollar bearish sentiment rather than a true comparison of the fundamental economic performance of the two countries. That type of price action may well continue as we enter the New Year, but the downward trend in USD/JPY is likely to exhaust itself if the Japanese economic situation deteriorates further. In short, it appears the USD/JPY rate may be closer to stabilizing and perhaps even reversing especially if the US could show some improvement in it Balance Sheet position.

Caveat for USDJPY

One major external factor that could impact USDJPY in 2005 is the possible revaluation of the yuan by Chinese authorities. As the benchmark for Asia, a revaluation would be significantly positive for the yen and hence negative for USJDPY. The JPY would rise significantly because a floating Yuan would give Japan the flexibility to allow the JPY to

appreciate as a result of increased competitiveness and reduce the risk of BoJ intervention. As we have stressed on many previous occasions, China's move towards Yuan convertibility is particularly important for Japan and USDJPY. Since the Yuan is not readily available for speculations, many traders have opted to express their views through the Japanese yen. The reason for the selection of this pair is because of Japan's close ties with China. As a net exporter, Japan competes heavily with China. China's artificial suppression of the Yuan has forced Japan to intervene aggressive to artificially depress the yen throughout 2003 and early 2004. Although Japanese authorities have been absent from the market for the past few months, the market is still cautious as the possibility of government intervention looms. China has recently taken measures to move closer to Yuan convertibility, which has already been be negative for USDJPY. China is gradually easing capital controls as they move towards Yuan convertibility. However, a free float is still not likely, instead the government will probably widen the trading band and/or move towards a weighted currency basket. This gradualness is still yen positive because it would give Japan the flexibility to allow their currency to appreciate as a result of increased competitiveness. One other major trend that we are watching in Japan is the selling of dollar denominated assets. So far this year, the Japanese have been net sellers of US treasuries for 2 consecutive months (September and October). Although 2 months do not make a trend, deterioration in the value of their treasury holdings and diversification of reserves are both valid reasons for waning Asian demand. If this "dollar dumping" continues, it will become an even alarming issue, which could have a negative impact on USDJPY in 2005. One major external factor that could impact USDJPY in 2005 is the possible revaluation of the yuan by Chinese authorities. As the benchmark for Asia, a revaluation would be significantly positive for the yen and hence negative for USJDPY. The JPY would rise significantly because a floating Yuan would give Japan the flexibility to allow the JPY to appreciate as a result of increased competitiveness.

Technical Outlook Keeping in theme with the dollar pairs featured here, the JPY too crumbled under the dead-weight of the greenback, making a salient collapse at the technically exemplary double top at 111.50 of August and September. The fall paused momentarily at a nearterm historical support of 107.00/50, then continued lower thereafter. We feel the stutter-step may have caught a few of the larger players wrong footed after acting in hopes of official action at these respective levels. If this is indeed the case, we should have a rather formidable barrier at the region. As is to be expected from this pair, technicals are very jagged and dodgy. Given the lack of fluidity in the indicators we are reserved in making concrete conclusions but have made some nonetheless. Not unlike any of the other pairs, the JPY appears to have been

over extended on the most recent move. Oscillators, such as RSI (63.77) and Stochs(20.2) have already begun to correct from extremely oversold reading, just as the ADX begins to roll over on the weekly chart. The daily offers further support to the correction scenario though they imply it may happen sooner than later since they have already moved squarely into overbought on the mild retracement from just above parity. Surprisingly, this pair, with all of its miscues and toothed like plots, created an incredible foretelling on the daily chart in the ADX indicator. Mid-November the indicator made a high of just above 35 (just below the 40, which indicates the contrary to the 25 reading) then moved closer to 30 before making a valley on its way back up to the 25 reading. After reaching the 35 reading on the second attempt, the indicator topped out creating a double top at precisely moment the trend as far as we know at this moment, to an end. However, our more exact projection methods imply barrier may lie a bit further still at the 109.50/110.00 area. Prior to the breakdown, the aforementioned resistance was extremely supportive, thus corroborating the amalgam. On the support side of the scenario, we feel a shift in consensus potent enough to drag the pair below parity could open the door to the 96.50 Fibonacci level. Key Levels: If the pair breaches 100, the downtrend will likely continue. The technical and psychological implications alone are enough to inspire a tremendous amount of bearish sentiment, opening the to the next key Fib level of 96.50. If the pair retraces from here, the 109 area will be critical as it coincides with the major Fib and at the present time, the 100 and 200-day SMA confluence. If the level is unable to contain a rally in the benchmark, a move closer to the upper reaches of the descending trend regression upper band (115.00) is likely.

GBPUSD Outlook Current Economic Conditions Throughout 2004, the UK enjoyed the most resilient economy among the G-7 nations. GDP growth exceeded the 3% pace every quarter while the unemployment rate rested at 4.7%, the lowest amongst the G-7 nations. Income growth has been strong as well with gains nearing 4% on an annualized basis. The UK economy has experienced 44 consecutive quarters of expansion the longest period of uninterrupted growth for the country in over 200 years. In fact, the UK was the only G-7 nation to avoid a recession in the last 5 years. The steady strength of the economy has created a highly speculative environment for real estate appreciation in the UK. In order to stem the developing housing bubble, the Bank of England enacted a highly restrictive monetary policy raising rates on 5 consecutive occasions last year. As a result of this action, the pound now carries the highest repo rate amongst the major currencies at 4.75%, exceeding the dollar by 250bp and the euro by 275bp. After a shallow slowdown during late summer/early fall, the outlook for the UK economy still remains mixed. The latest series of Services and Manufacturing PMI surveys increased well above the 50 expansionary level, which provides cause for optimism. The labor market and retail sales still remain buoyant. However, not all is perfect with the UK economy. The BoEs interest rate hikes are gradually working its way through the economy, slowing growth in many different sectors. The housing market remains frothy with the latest HBOS survey of prices registering a 16.8% year over year gain. This reading is slightly lower than the prior months 18.5% gain, but demand remains buoyant enough for the BOE to possibly consider further tightening moves. A far bigger concern for the UK economy is the high level of consumer debt engendered by the housing bubble. In 2004, total housing debt surpassed 1 Trillion GBP for the first time in the countrys history, matching the value of the annual GDP. Additional rate hikes by the BOE may inadvertently push the economy into a recession, by raising the cost of debt service for UK consumers. Another problem that the UK economy faces is the rapidly growing trade deficit. The latest report showed a gap of 5300M GBP versus expectations of only 4750M, as imports rose by 8.5% while exports only gained at 2.5% rate. The strong value of sterling, which is responsible for the heady pace of spending by UK consumers for all things foreign, is at the same time depressing global demand for the goods and services of UK businesses. If the spread between exports and imports continues to widen, the accumulated trade deficit may become unsustainable for the country, which could force a downward adjustment in the currency.

Monetary Policy Outlook

BOE Monetary policy for 2005 will most likely be driven by the dynamics of the housing market and the quality of UK economic growth. The Bank of England hiked rates for the last time in August. Presently, the short sterling futures are not pricing in a rate hike over the next year. In 2005, the BOE will have to walk a fine line between a monetary policy so hawkish that it could trip the UK economy into a serious slowdown and being so laissez-faire as to unleash the nascent inflationary pressures from the country's highly speculative real estate market. The task is further complicated by the high amount of household debt already present in the UK economy, which could be extremely susceptible to even a small up tick in rates. Up to now, the BOE has managed its challenges masterfully, properly reacting to changes in the market. With rates at a G-7 high, the BOE even has the option of materially easing monetary policy should growth in UK rapidly deteriorate. In contrast to many of its G-7 counterparts, the BOE stands in the enviable position of having a full array of monetary policy tools at its disposal in 2005. We expect them to actively manage and tweak monetary policy more aggressively than their global peers if the economic situation warrants a change rates.

2005 Implications

In the upcoming year, the critical question for the pound will be the UK economys ability to maintain a healthy growth rate while controlling its escalating balance sheet problems. If the Bank of England can contain the rising imbalances in the housing sector and reduce the pace of consumer debt accumulation, the UK economy should carry on its historic record of continuous growth. However, one troubling aspect of the current UK economy is the inverted yield curve in its fixed income markets. The longer dated UK bonds are offering a lower yield than short term paper. Inverted yields happened infrequently, and typically signal the markets opinion that growth may slow. In 1996, the NY Federal Reserve did a study on what indicators were the most reliable predictors of a recession. The only one of six indicators that was significantly reliable was an inverted yield curve. Whether this bodes badly for the UK, only time will tell. Another key risk for 2005 is that the large interest rate differential between the pound and the dollar has loaded the GBP/USD pair with speculative positions from carry traders. As a result, shifts in monetary policy bias by the central bank will cause the pair to be very volatile and vulnerable to speculative flows. We are already seeing evidence of this trend. To the surprise of the market, weaker growth in Europe and Japan and a rise in the sterling prompted at least two members to bring up the possibility of a rate cut at their

December monetary policy meeting. None of the members discussed the possibility of another rate hike. Therefore even though the central bank is clearly on hold and not likely to reduce interest rates soon, their bias is becoming increasingly dovish. Unlike the EURUSD, the GBPUSD has historically been an attractive currency pair to go long for carry trades due to its relatively higher interest rate differentials. Therefore, whenever there is news that can threaten or narrow this differential, the pound suffers from volatile moves as speculators rush to exit positions. Sharp price reversals in 2005 could very painful for those on the wrong side of the trade. Politics will also play a role in the currency markets next year since the political fortune of Tony Blair and the Labor party is at stake. Under normal circumstances, Blair should expect an easy victory in next Mays parliamentary elections. During his tenure, the UK has enjoyed unprecedented prosperity. However, Blairs unequivocal support for the Iraq war has turned a seemingly assured election into a possible tossup. Should the geopolitical situation in Iraq deteriorate substantially with concomitant UK troop casualties, Blairs chances of winning could decrease. More importantly to the market, a loss for Labor would mean the loss of Gordon Brown as the UK Chancellor of Exchequer a man who is considered by the FX market to be the most skilled and effective public policy manager in the world. Therefore, UK politics and the end of the tightening cycle should result in underperformance of the GBP against the EUR and CHF. Thus, in the first half of 2005, price action in the pound may be driven by political concerns as much as economic developments.

Technical Outlook

Though this pair reacted in a similar diametric fashion to that of the CHF, JPY, and CAD, the single British currency was strengthening as the dollar weakened, creating some very large divergence in the relationship of the two, thus taking the pair to 12-year highs. Interestingly, the stall in the rally came at the 61.8% fibo retracement of the rally of the summer range, which drafted a ubiquitous Head and Shoulders. Despite the bearish connotation of the formation, the pair failed to remain under the influence of it for an extended period of time. After breaking above the head of the formation, the rocketed nearly 800-pips to the reciprocal of phi multiplied by the range encompassing the formation. Naturally, the trend implies a move higher is in store for this market, but we appear to be in the midst of drawing a Double Top. Weekly studies postulate similar readings to that

of the EUR, in that they are very extended to the bullish side of things. We have MACD convergence from a positive reading, RSI (75.89) and Stochs' (90.14) at extremely overbought levels respectively. Another bit of exemplary information available to us implying the trend is close to ending is the ADX. Notably, the trend barometer tracked as high 45 during the February's rush to multi year highs against the benchmark, while present reading is much lower - at 23.5. This divergence of sorts from what was clearly a trend in the past is indicative of a weak rally and a moment of inefficiency in the market. Key Levels: Going forward, the same studies that predicted the most recent stall in the overt trend higher indicate 1.9750/9800 as the next likely level of a potentially pivotal resistance. The studies also indicate 1.8850/8900 as support with 1.7450 thereafter. Though this pair reacted in a similar diametric fashion to that of the CHF, JPY, and CAD, the single British currency was strengthening as the dollar weakened, creating some very large divergence in the relationship of the two, thus taking the pair to 12-year highs. Interestingly, the stall in the rally came at the 61.8% fibo retracement of the rally of the summer range, which drafted a ubiquitous Head and Shoulders.

AUDUSD Outlook Current Economic Conditions Overall, 2004 was a year of solid strength for the Australian economy as the boom in Asia generated strong demand for its commodity- based currency. Unemployment hit 25 year lows while business confidence reached record highs. Contributing to the heady economic environment was solid wage growth, averaging 3.5% on a year over year basis. Finally the strength of gold, which rose to a 10 year high of $450/oz this year, was also a major boom for Australia. As the world's third largest gold producer, after South Africa and the United States, Australia generated significant revenue from its 2nd biggest export. However, because Australia is not an oil producer, the marked increase in energy costs during the 2nd half of the year weighed on economic performance. Retail spending had fallen short of forecasts for five months in a row, the decline in housing activity continued and perhaps most worrisome of all, the trade deficit expanded as exports failed to keep up with projections while oil-driven imports mushroomed, creating a record gap. Although oil costs took their toll on the economy, the Australian dollar actually rallied into the end of the year on the back of the gold rally. Gold clearly has a greater impact on the currency than oil. In fact the two commodities often trade in tandem, as a result of the dollar reaction. Therefore, even as the Australian economy suffers from higher energy costs, the Australian dollar has benefited from the appreciation in gold. Monetary Policy Outlook Responding to the recent stall in economic activity, the RBA was forced put its restrictive monetary policy on hold, keeping interest rates at 5.25% for 3 months in a row. A recent speech by Reserve Bank of Australia deputy governor Glenn Stevens, indicated that the bank remains in no hurry to change interest rates. Mr. Stevens said the Australian economy this year had turned in a steady performance, with the credit-fueled housing boom gradually unwinding. Although growth may have slowed, this was more due to a lack of supply than demand. He also forecasts gradually rising inflation over the next two years. Many analysts believe that Mr. Stevens modestly hawkish views reflect the RBAs monetary posture for 2005. In short, monetary policy for Australia in 2005 is likely to be steady with the possibility of rate hikes if inflationary pressures driven primarily by higher energy costs continue to press on the economy. The RBA has previously expressed their intention of bringing rates back to neutrality, which was previously defined at between 5 - 6.25%. 2005 Implications In 2005, the carry trade advantage enjoyed by the Australian dollar is likely to be diminished, as the Fed embarks on its own tightening policy expected to ultimately raise

the fed funds rate to 3.5% while the RBA is projected to be much less aggressive in instituting additional rate hikes. With the Australian economy having slowed to a 0.3% GDP growth rate in the latest quarter while the US continues to post a healthy 3%+ growth, the Australian dollar may experience additional selling as 2005 progresses. Furthermore, should Chinese demand for commodities, especially base metals wane in 2005, the impact to the Australian economy would be substantial. If the RBA were then to lower rates as a response, the speculative outflow (parked in carry trades) from the currency could create an even sharper price break than in the GBP/USD as liquidity in the Aussie is thinner. However, if the US growth stalls forcing the Fed to delay its measured rate hike policy, the Aussie may again attract the attention of carry traders as demand for yield could push the currency higher.

Technical Outlook In 2004, the Australian dollar has benefited significant from high interest rates and its strong correlation with commodity prices. The rise from the 38.2% fibo (.6790) of the 01-present range was a fortuitous one to say the least. The last touch, early September, rocketed higher with three consecutive days of retracement. Unlike the NZD, the pair was unable to shake-out the trend and carry posse, perhaps explaining the apparent mass exodus at the first sign of dollar strength mid-November. The retracement halted well shy of the 100 and 200-day SMA and the 50% retracement of the latter 04 buying spree. Much like the NZD, the AUD is extremely extended on this most recent rally against the dollar. This extension comes at the same time leading indicators imply a waning of the trend in that the ADX is making consistent lower highs as the price makes higher highs. Key Levels: The largely unwavering trend implies unmistakably that a move higher is eminent. However, as the maxim goes, the only thing certain is uncertainty, and that certainly applies in this case. Nevertheless, our most accurate forecasting techniques infer a move higher should be resisted at .8000/50 with another potentially pivotal level at 8450/8500 as you can see here on our charts. Conversely, a move lower will likely be supported at the present-time confluence of the 100 and 200-day SMA at .7250/7300

NZDUSD Outlook Current Economic Conditions Like Australia, New Zealand was a huge beneficiary of commodity demand from China. In a country where 25% of manufacturing output is comprised of dairy and meat processing, the growing Chinese need for staples contributed to a near 5% GDP growth rate in 2004. A residential property boom further fueled the economy, as the country attracted more immigrants. Median house prices have risen more than 34% in the two years generating additional wealth. Unemployment reached a 17 year low with the unemployment rate dropping almost a full percentage point over the past year from 4.6% to 3.8%. Meanwhile wages increased for the third consecutive quarter rising 3.3% on year over year basis. For New Zealand the only economic blemishes in 2004 were budding inflation and a dangerously wide current account deficit. Inflation gathered force in 2004, registering 2.4% year over year gain, led mainly by strong wage growth, rising housing values and a big jump in energy costs. In 2004 the current account deficit unexpectedly widened to NZ$6.44 Billion from a projected gap of only NZ$5.6 Billion as consumers spent more on cars, appliances and other imports. By the end of the year the New Zealand CA deficit stood at a troubling 4.6% of GDP. Monetary Policy Outlook Sparked by the boom in housing and an up tick in inflation, the RBNZ maintained its hawkish stance for most of 2004 raising rates a full 1.5% during the year to 6.5%. However, the last 25bp rate hike on the 28th of October may have been the final one for some time to come. The Reserve Bank Governor Allan Bollard left rates unchanged at the subsequent RBNZ meeting in November, but gave no indication of any possible easing in the near term. Nevertheless, many analysts expect RBNZ policy to become much more dovish as 2005 progresses and the rate of growth for the New Zealand economy cools, which would be negative for the New Zealand dollar. Most economists project a significant fall off in GDP growth from 4.6% presently to 2.4% in 2005 as demand for commodities scales down. Under those circumstances the RBNZ may feel compelled to ease rates in order to orchestrate a soft landing for the NZ economy rather than risk a recessionary outcome. 2005 Implications Like the Aussie, the Kiwi may not be aided much by its huge carry trade advantage in 2005. If the Fed continues to pursue its tightening policy and eventually reaching its 3.50% fed finds rate target, while the RBNZ decides to lower rates from their present 6.50% level, the interest rate differential would begin to converge inviting speculative flows to out of the kiwi and into the greenback. Because so much of the demand for the Kiwi is based upon the large interest differential with the dollar, a change in the spread

will generate a massive exodus of carry trade capital, which could create very volatile price action in the thinly traded pair. The Kiwi is also likely to come under pressure from its ballooning Current Account deficit, which some analyst believe could reach 7% of the GDP in 2005 unless the country could contain its import spending. If commodity prices plummet, weaker demand for commodity-based exports could also have a significantly negative impact on the kiwi. On the other hand, if dollar bearish sentiment persists in 2005, the Kiwi could continue to appreciate. However, if the US is able to stabilize its own Balance Sheet problems, then Kiwis biggest gains may have already occurred. Technical Outlook The past half-year for the NZD was rather stellar, as the pair made higher highs and lower lows iteratively. The move made two retracements in the process however: Both just a smidgen past the 50% retracement point. This fact likely served to stop out many inopportune trend and carry players in the process, while rewarding some of the more agile countertrend players. Interestingly, the pair stalled prior to the February highs (.7100), then rose through the resistance mid-November off a double bottom formation with out any hesitation. Shortly thereafter the pair dropped below the region momentarily and it now trades just above the region. Given the fact that we have an overt trend higher it seems intuitive to surmise more if the same is in store. The weekly technical bearing indicates a diverging MACD coupled with extremely extended oscillators (Stochs (82.84) and RSI (69.59), with an ADX making unequivocal lower lows in the process. That combined with indications on the daily time frame entail an at least near-term top in the pair. Key Levels: The Fibonacci projections indicate a pivotal shift in consensus may take place at .7800 if the price continues to follow the trend. I.E., if oil begins to rise off the 200-day SMA it currently trades on and/or gold breaks 455/460 16-year high resistance. Conversely, if a retracement is in store, the pair may find a base near .6300 with another level of predicated

USDCHF Outlook Current Economic Conditions In 2004, the Swiss economy grew at a steady and unglamorous pace of 2%. In the second half of the year, demand was dampened by the massive rise in oil prices and the broad global slowdown, which disproportionately hurt the export dominated economy. Job growth remained virtually non-existent for most of the year with the unemployment rate steady near 3.9%. The KOF index of leading economic indicators fell from a high of .92 all the way down to .71 by November, while Retail Sales declined -0.3% on year over year basis. In the face of a stagnant job market and crimped by the high fuel prices, Swiss consumers curbed their spending, producing lackluster results for the economy. The Swiss franc however, performed considerably better than the Swiss economy in 2004, as the currency was the primary beneficiary of risk aversion. Although it only yields a 0.75% mid rate, the franc benefits tremendously from "flight to safety" concerns whenever geo-political concerns flare up. In 2004, the troubles in Iraq contributed to its strength. The CHF is unique amongst the majors because of the country's political neutrality and because 40% of the currency was previously backed by gold. Therefore, gold's rise from $325 to $450 over the course of the year greatly benefited the currency, with the Swissie reaching nine-year highs against the dollar. Monetary Policy Outlook Like its much larger European counterpart, the SNB is a hawkish central bank, focused primarily on combating inflation. The Swiss fed funds rate structure is different from other major central banks. Instead of settling on a specific interest rate, the SNB prefers to manage a band of rates with the upper end of the band constituting it's key target. After keeping rates at an ultra accommodative level of 25bp for the first half of the year, the SNB proceeded to tighten monetary policy this past May and raised rates to 0.75% by year-end. Even after the tightening, Swiss rates still maintain a negative carry cost of 125bp against the euro and 150bp against the dollar. In fact amongst advanced industrialized countries only Japan maintains a lower interest rate than Switzerland. Despite the relatively low rates, the recent rally in the Swiss franc has alarmed Swiss monetary authorities, who fear that a super strong currency will hurt the country's large export sector. In a barely veiled threat to the speculators, SNB Governor Jean-Pierre Roth, recently noted, "Vigilance is of the essence - Recent foreign exchange market developments show that in highly turbulent times the CHF can come under upward speculative pressure. This may interfere with our domestic monetary strategy and can eventually trigger corrective policy actions." Through this statement Mr. Roth made clear the SNB will be much more flexible and responsive to market action than the ECB and should it perceive that its currency is appreciating far in excess of its monetary goals, it will not hesitate to reverse it's tightening policy in spite of the negative carry implications still present in the currency.

2005 Implications In 2005, the Swiss economy will likely continue to track global demand and it's growth rate will be dictated by the powerful export sector. The country's GDP will receive a substantial boost if energy prices decrease as both consumers and industry will be able to reduce costs and increase spending. However, as the main beneficiary of flight to safety capital, the price action in the Swiss franc is unlikely to be governed by economic fundamentals. In fact, while the Swiss economy will most certainly perform better in a low oil price environment, the Swiss franc will most likely appreciate substantially if oil prices reached record levels. High oil prices will almost certainly connote an increase in geo-political tensions, which are also likely to lead to higher gold prices. Since the CHF is considered "liquid gold" in the FX market, a further rise in the metal will likely move CHF to record highs against the dollar regardless of the state of the Swiss economy. On the other hand, if the global geo-political situation cools materially in 2005, creating retraces in both oil and gold while spurring better economic growth worldwide, the Swissie is likely to lose ground against the greenback as appetite for risk will return to the currency market. Technical Outlook The synthetic pair has made some incredible moves in its own right - recently dropping to ranks not seen since '95. On a daily scope the action look strikingly similar to that of the of the JPY and CAD, though the all-pervading breakdown occurred a month later than the JPY and two months after the CAD. Not unlike the others, a base at 1.1300 was established in recent sessions. Subsequently, a consolidated range ensued offering a few opportunities for range traders to realize gains just short of a servant's pittance. Nonetheless, the range has created a key tipping point to calibrate the Fibonacci levels. The studies indicate in the event of a move higher 1.3230 is the most probable resistance. Conversely, a move to 1.0520/50 is likely support. The trend in the benchmark is now more overtly apparent than it is in this cross. This fact often makes it difficult to see any early warning of a shift in the trend in the technical studies of the Swiss franc. Nevertheless, the diverging nature of the 26 and 53-week SMA is arguably supportive of a continuation of the trend as is the converging daily MACD from the positive side. On an ultra-near term basis, a move above the regression centerline seen on the weekly chart is necessary for this synthetic pair to make any considerable strides for another test of the upper reaches of the channel for a potential breakout. Considering the trend, many will favor the latter scenario, but a sustained period below 1.1300 will have to come to fruition before that takes place. Additionally, the daily oscillators have risen considerably on relatively small rise in price. This indication

generally implies a continuation of trend. Given the fact that this pair is largely influenced by geo-political factors the technicals are often inconclusive. However, what they do infer in their own fuzzy kind of way does support the inverse indication of the EUR, as they should. Key Levels: In the event of a failure to trade above the regression centerline near present pricing, the pair will likely break down below the recent lows and begin to make strides for the 1.0600 fib projection zone. If the multi year lows do hold up a move higher is likely, with the confluence of the major fib segment and the 100 and 200-day SMA.

USDCAD Outlook Current Economic Conditions In 2004, the Canadian economy was a major beneficiary of the booming demand for oil as well as other industrial commodities. With huge secular demand coming from China, Canada's economy enjoyed a banner year with GDP growing above 3% for the past two quarters and the number of jobs increasing in 8 out of the past 12 months. Industrial capacity operated at a healthy 85% rate while retail sales have registered month over month gains in 9 out of 10 periods this year. However, after rising 22% against the US dollar between May and November of this year, there are now signs of a possible reversal in the Canadian dollar. Sentiment in the CAD has shifted significantly over the past 2 weeks with the Bank of Canada altering their monetary policy stance and oil prices receding 26% since hitting a high of $55.67 bpd on October 27th. Meanwhile the rapid rise in the loonie has hurt the country's export sector, which comprises 40% of Canadian GDP. Monetary Policy Outlook The Bank of Canada left interest rates unchanged at 2.50% in December but the shift in expectations occurred on November 24th, when BoC Governor Dodge shocked the markets by saying that he was concerned about the CAD's impact on growth and inflation. Prior to that, the market had expected a rate hike given the hawkish comments in the last monetary policy statement. The latest statement acknowledged the risk imposed by further strength in the Canadian dollar. One of the most important parts of the statement was the removal of the phrase "Further reduction of monetary stimulus will be required over time," suggesting that the BoC may have moved to a neutral monetary policy. The shift in policy and the unlikelihood of interest rate hikes in the first half of next year could exacerbate a reversal in the Canadian dollar. 2005 Implications In 2005, the strength of the loonie is likely to be primarily dictated by the strength of oil as well as the extent of Chinese demand for industrial and consumer commodities. Although oil has fallen by over 20% from its recent highs, many analysts expect prices to stabilize and perhaps rally into 2005 the global economic expansion and limited supply continues to exert upward pressure on prices. The rapid appreciation of the CAD created problems for the Canadian economy, including deterioration in Canada's Balance of Trade, a second consecutive monthly decline in manufacturing and a much smaller than expected job gain in the most recent period. With 85% of Canada's exports destined for the US, the trend of exports is particularly sensitive to the performance of the Canadian dollar. Most recently, we have

seen evidence that CAD strength has led to weaker growth. GDP growth for the third quarter fell short of expectations, falling to 3.2% from a downwardly revised 3.9% as weaker demand for exports and higher currency appreciation dampened consumption. The world's eighth largest economy climbed an annualized $954 billion in the quarter as exports accounted for nearly 40 percent of the economy. However, with the recent currency appreciation, exporters have had to reduce prices in hopes of maintaining sales with the U.S. Labor market data also disappointed as the net positive change in employment increased less than expected, with the unemployment rate increasing. Deteriorating data hurts the outlook for the Canadian dollar. As a result, traders sold the loonie and considerably trimmed its year to date gains against the greenback. The CAD may be in for further weakness if oil prices remain at current levels and the Fed continues to pursue its tightening strategy. In that case, the greenback will begin to generate a positive interest rate differential, assuming that the BoC will continue to adhere to a neutral monetary policy and not raise rates beyond the current 2.50% level. However, rapidly accelerating oil prices will likely trump all other considerations in the minds of traders. Canada is now the largest exporter of oil to the US, and large gains in the price of the commodity will produce strong positive effects throughout the Canadian economy possibly spurring another leg in the CAD rally. Technical Outlook Price action in the CAD was rather lackluster throughout the first half of the year. The pair traded within the confines of a horizontal range, drafting a large Head and Shoulders in the process. However, the last 4 months have been rather impressive, with the single currency gaining 16% from the May low to November high against the benchmark dollar in very short order so to speak. The move in the cross coincided with the broad based decline in the benchmark against just about every other currency and the rapid rise in dollar denominated oil prices. After spending six months in a sharp prolonged downtrend, USDCAD is showing signs of a possible reversal. ADX is trending lower and moving back down towards 20, MACD is in positive territory, RSI is pointing upwards and the 20-day moving average is beginning to cross above the 50-day moving average. The sharp rally on Dec 7 gives scope to a possible extension move towards 1.2595, the 38.2% Fibonacci retracement of the May to November bear wave. There are however areas of congestion prior to that, namely the 1.2345 Oct 28 high and 1.2520, which is the 100-day SMA. A close below 1.2035, the Dec 6 low would negate bullish momentum, while a break of 1.1930 would threaten the possible bottom. Key Levels: Going forward, the confluence of a key Fibonacci level and the present time 100-day SMA should create a formidable barrier near and above the 1.2500 handle. A move above that, if potent enough to breach the 200-day SMA will likely be resisted at the 50% retracement. On the support side, we obviously have a rather sizable region of

support created by the November lows (1.1720). A break below the aforementioned support will open up the gate to the 1.2120-1.2400 region.