Some quite remarkable events have taken place since our last bulletin:

• The Argentinean collapse and default,
• The euro entering circulation
• The yen falling,

The ring fencing of Argentina has so far proven to be even more solid than we thought. However, the Argentine story is far from over. President Duhalde is a populist unlikely to pursue economic rigueur, and who may well open the door to massive inflation, economic isolation and collapse and, very possibly, to insurrection and military government. Emerging markets will be well tested by post-default Argentina, yet we remain relatively optimistic about them overall, and especially about Russia.

The euro is off and running. It is not without threats, like Italy's cheating on the EMU rules and fears that Southern European countries may suffer from having their currency out of their own control. Nonetheless, the advantages of a single currency should gradually unfold, and international demand for the euro (Asian Government reserves and grey market operators in Eastern Europe) should give it strength.

Commentators on Japan are still expressing doubts that even yen devaluation will be enough to turn the economy round. Our view is that yen devaluation should not be seen as a route to "exporting Japan's way out of recession", but as a means of introducing inflation. We have argued for more than two years that only inflation can persuade the Japanese to increase domestic spending, the only lasting route to expansion in an economy already heavily export-orientated. A declining yen is bound to have repercussions for other Asian currencies, not least the Hong Kong dollar, which might find its peg to the US dollar rather heavy to bear.

Over the last few months, our views about the fundamentals of the US economy have been much less optimistic than those either of the financial markets or of most commentators. We do see a recovery, but only at the end of 2002. This view is gaining favour, but with a variant built round a "double-dip" recession. It may not be too long before we are accused of over-optimism! However, for the moment our expectations on interest rates remain as they have been for some months: every chance of a further cut in the USA, one or two cuts still to come in Europe, and then holding steady till year's end. If the economy does begin expanding in the USA at the end of the year (our current scenario), the long end of the yield curve will move up, much as it did at the end of 2001. That supposes of course that the recovery we foresee at the end of 2002 has a firmer foundation than the one financial markets perceived at the end of 2001 and to which they are still clinging.

The consequences of the overpriced, share-based acquisitions of hi-tech companies in the late 1990s are only now coming home to roost. A relatively new US accounting rule means that companies may no longer dribble away goodwill over forty years. Now they must write down goodwill if its original justification, viz., that profits from an acquisition justify a price in excess of book value, are proving unfounded. Such was the case with last year's JDS Uniphase $50 billion write-off, but at least that company had the merit of facing up to the problem early. Such will be the case with AOL Time Warner, Viacom, AT&T and Qwest and a host of others in the coming months. The amounts due for write-off are much greater than the profitability of all companies in the S&P 500 index put together (in the order of several hundred billion dollars vs. annual earnings expectations of some $400 billion per annum). The write-offs will have an interesting impact on stock valuations!

The United Kingdom continues to astonish. While manufacturing hurts, consumers just will not slow spending. The BoE is making noises about needing to raise interest rates, despite the howls of protest that will cause from industry.

With the passage of the year, our recommendations on average maturities now look quite short (four years). We have been on the qui vive for further shortening in the event of the US achieving traction and the Fed raising rates. It looks like we may relax over that eventuality.

Recommended average maturity for bonds in each currency
We leave our recommended average maturities at a little over four years.

The major topic over the last three weeks has been yen weakness. Since the intervention by the BoJ in October, which showed their determination to weaken their currency, the yen has lost approximately 10%. So far. no opposition to this move has been heard from US officials or their Japanese counterparts. Thus. the trend for a weaker yen is well in place, even though a technical correction could occur at anytime. Moreover, countries like China, Korea and Taiwan, as well as US manufacturers, might show their discontent with the weaker yen.

EUR/USD: Trading range of 0.8850 to 0.9050. A break of the support at 0.8810 or of resistance at 0.9080 could provoke the next movement of 100 to 150 points.

USD/CHF: consolidation in a 1.64 to 1.66 range. Breakout level is 1.6780 on the topside and 1.6250 on the downside

USD/JPY: The weakness of the YEN is continuing with our next target at 136.90. A major technical correction could occur anytime with supports coming in at 130.40, followed by 129.10.

EUR/JPY: Trading in a 116.50 to 119.50 range with some buying interest below 116.00 and strong profit taking in the upper 119s.

USD/CAD: Here again, the renewed weakness of the CAD should be used to establish a short USD/CAD position at 1.5955, with a price objective of 1.5650 and a stop loss at 1.6280.

AUD/USD: The Aussie has built a solid base above 0.5000, but needs to break 0.5280 on a weekly basis to make further progress, direction 0.5400.

GBP/CHF: Extreme volatility will remain in this cross and only a clear break of the resistance at 2.3850 would open the door for its next target at 2.4100. Major support comes in 2.3550, followed by 2.3300.