The rebound happened sooner than we thought. In the last Gulf War, the rally began on the day of the attack. This time, as if investors sought to be in place ahead of time, the mere removal of uncertainty was sufficient. When fundamental trends are bucked, investors must hold most firmly to views developed over many years about where the economy is heading. To investors geared up to swing quickly behind surges in the dollar, in equities, or to step out of bonds smartly for a few days, we take off our hat. However, our role remains to think strategically. In this context, bond prices should soon offer a buying opportunity.

The post-war outlook does not look good. Our bell-weather for bullishness for the US economy is Business Week, the magazine so prone to see the recovery a rolling six months away. About a month ago, BW started singing much the same song as ours, that the US imbalances are just too great for a recovery, even after a speedy defeat of Saddam Hussein.

Without further repetition of our long list of imbalances, we have noticed two items of particular interest:

• The US current account deficit has increased from $ 400 billion in 2001 to $ 500 billion per year now, worsening as devaluation first increases the costs of imports, before it has a favourable effect on export competitiveness. Can the dollar recovery be anything but short-lived with such a burden?
• The income balance has reversed. This means that the USA has to pay out more in dividends and interest than it receives.

The sole superpower, despite enormous military power and consumption, is showing economic feet of clay. The headlong rush into deficit of all types is a vicious circle akin to a spendthrift borrowing to keep spending but all the time running up insurmountable debts. No one should gloat over this. Better to hope that the American people themselves will see the folly of the federal, state and local governments getting ever more into debt, even while they (the consumers) are finally tightening their belts. Sadly, no alternative to the economic policies of the Administration is being voiced. Democratic politicians dare not speak about austerity, for example. However, austerity is where the current policies lead. One favourable result of the end of war will be to allow US economic debate not be confused with patriotism. The starkness of the economic fundamentals will also be clear to all, despite officials (like the Fed) persisting with the myth that "once the war is over, the economy will find traction". It will not, because the war was not the cause of lost traction in the first place, and most of its effects will be to amplify the imbalances.

Europe seems to be being a little more truthful about the state of its economy. It is already obvious that growth rates have to be revised down, and that interest rates will be cut further. The very awfulness of the French and German economies may give them a chance to expand once the dust settles. The unemployment and pension situations are now pushing weak governments towards long-overdue labour, fiscal and social reforms. Moreover, there is room for domestic expansion and for interest rate cuts.

The UK is in a less happy state than it has been for some time. Politically, we see the Blair weakness as short-lived. A quick war, with weapons of mass destruction duly found, will make him a hero who, on a matter of principle, braved his own party's and the public's opposition to military action. If, however, no such weapons are found, all bets on his future are off. The UK will have maintained its relationship with the USA, but Blair will likely not be the beneficiary. On the economic front, many problems similar to those in the USA, such as trade deficit, excessive household indebtedness and a housing bubble, hamper the outlook for the UK. Joining the euro at present is inconceivable. There was once an economic case for and a political case against. The US/UK vs France/Germany cleavage on Iraq reinforces the political case, while weaker Sterling is inevitable even as the dollar continues downward, pulling the pound after it.

Inflation is popping up almost everywhere this last month, but it is very linked to the price of oil. Anti-inflation forces are still very much in place in the euro zone, but weaker in the US and the UK which do not have the protection of strengthening currencies. We therefore maintain our view that the ECB will cut further, justifying our ten-year recommendation for euros.

Recommended average maturity for bonds in each currency

We maintain our recommendation for maturities in euro to average ten years.

EUR/USD: 1.0655 remains the key level. A weekly close below this would open the door for 1.0540, then 1.0410, with a final target of 1.0320. On the upside, we would see 1.0810 and 1.0950

USD/CHF: Here, 1.3770 remains the key pivotal point. As long as we stay above this, targets remain 1.3990 followed by 1.4100. On the downside, objectives are 1.3520 and 1.3420.

USD/JPY: Same comment: capital repatriation is still reinforcing the JPY. Currency intervention is putting a temporary floor on USD/JPY of 116.50. A weekly close below would open the door for 115.00. Upside resistance is at 117.80, 118.20 and 119.50.

EUR/JPY: Same comment: broad consolidation in a 125.00 to 130.50 range, coming off the highs and testing the lower side of the range again.

GBP/USD: Key level at 1.5850 after testing the 1.6100 area again. There has been a sell-off down to 1.5600. The next big support is at 1.5480.

USD/CAD: Same comment: as long as we stay below the key resistance of 1.5050, the price objective remains at 1.4200, with 1.4700 already tested. The trend remains your friend.

AUD/USD: Key level around 0.5970/0.6000. Below this, the objective is 0.5880, followed by 0.5830. Topside, a weekly close above 0.6000 is needed to generate some renewed buying interest.