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April 28, 2006

Poor Auctions Add Dollar Insult to Injury
by Ashraf Laidi

In addition to the Bernanke-driven dollar damage (see Dollar Damaged as Bernanke Gets Real + China's Rate Hike),the dollar's woes are compounded by lackluster indirect bids in yesterday's 2-year and today's 5-year auctions. The 24% participation in the 2 year Treasury auction was the lowest since November 2004, while the 21% participation in today's 5-year auction is the lowest since the records began in February 2003.

Although the high yield element of the US treasuries does remain a point of attraction for foreign investors, it is not reflected in the primary auctions, leading to us to believe that private investors are mostly snapping them in the secondary market.

But the increasingly meager foreign participation does reflect a general backtracking in foreign demand for US paper in light of the combination of a looming end to the Fed rate hikes and the emergence of the dollar's external imbalance, which is not expected to acquiesce any time soon with oil prices on the rise.

EURUSD's break of the 20-month trend resistance of 1.2480 to 1.2548 remains accompanied by a bullish development in momentum (see MACD), which makes $1.2587 the next target on queue. End of quarter target stands at $1.2640. Year-end target at $1.29.

(SEE CHARTS BELOW)

The selloff in USDJPY stabilized above the 113.80 support -- 38% retracement of the 101.66-121.36 rise. A breach below 113.40, calls up key foundation at the 200 week moving average of 113. End of quarter stands at 112 in the event that Bank of Japan does not raise rates before end of June. One the BoJ does raise rates (July), we could see 110 holding for most of summer. End of year target at 107.

Ashraf Laidi
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