NERVOUS CONSOLIDATION SEEN IN CURRENCY FUTURES
Currency futures at the International
Monetary Market (IMM) are likely to consolidate near current
levels in nervous trading conditions over the next few days,
although underlying sentiment remains positive, currency
analysts said.
    "Currencies are likely to muddle around these levels," said
Shearson Lehman Brothers analyst Anne Parker Mills.
    Traders are unwilling to establish either long or short
positions in futures because of uncertainty over upcoming trade
talks and U.S. trade legislation, they said.
    Japanese prime minister Yasuhiro Nakasone and President
Reagan will meet Thursday and Friday to discuss trade tensions
between their two countries, while at the same time the
Democratic-led U.S. House of Representatives will be voting on
a controversial trade bill.
    "Unless something really surprising comes out of the
Nakasone/Reagan talks, I don't see the dollar getting above 142
(yen) and 1.83 (marks)," Mills said.
    The equivalent in futures of those interbank levels are
about 0.007050 to 0.007025 in the June yen contract and about
0.5500 in June marks, she said.
    June yen closed at 0.007191 on Tuesday while June marks
finished the day at 0.5602.
    Mills said, however, that "the chances of them (Reagan and
Nakasone) coming up with something new are limited." One
possibility might be a Japanese discount rate cut, but "they
probably won't do that unless we raise our discount rate."
    Recent firmness in the federal funds rate and the Federal
Reserve's slowness in adding reserves to the banking system has
heightened sentiment that the money-policy making body has
already tightened credit and a discount rate hike is possible,
analysts said.
    Recent weakness in currencies and strength in the dollar
has been more the result of nervous shortcovering ahead of the
meeting rather than reaction to the White House statement
Monday supporting a stable dollar, said Harris bank currency
analyst Earl Johnson.
    Traders "are worried about the outcome of the talks between
Reagan and Nakasone," and as the talks are late in the week,
the market may not get a chance to react to any developments
until Monday, Johnson said.
    Until then, Johnson expects the dollar to remain in a broad
range between 1.77 and 1.85 marks and 137 to 140.50 yen.
    Chicago Corp analyst John Bilson, however, expects a rally
in the European currencies over the near-term, while the yen,
at this point is overbought.
    "The Japanese are moving away from the U.S. market," and
investment funds formerly directed to the U.S. are likely to
flow into Europe, Bilson said.
    The chief beneficiary of such a flow of funds will be
sterling, Bilson said.
    "Sterling rates are about four pct above Japanese rates,
despite the half point rate cut," Bilson said. Major U.K. banks
lowered their base lending rates today to 9.5 pct.
    In addition to a favorable interest rate spread which
should attract funds, Bilson said the firm oil market and the
strong political situation of Prime Minister Thatcher also make
British investments attractive.
    Passage of the trade bill, which includes an amendment by
Missouri Democrat Richard Gephardt that would force a 10 pct
annual cut in imports from countries with an excessive trade
surplus with the U.S. if they fail to remove unfair trade
barriers to the U.S. after six months of negatiations, would
likely pressure the yen, Bilson said.
    Bilson, however, said the legislation is unlikely to pass,
but that Nakasone is likely to bring a promise to open Japanese
markets to U.S. goods and back it up with government contracts
with U.S. manufacturers.
 Reuter
