What a start to the year.

Another poor employment number here in the states, weak store sales, a continued slumping housing market and it all adds up to lower U.S. rates. This of course is exactly what Mr Bernanke said this week. The market (as am I) are looking for 50bp later this month when the Fed meets. The curve has steepened out tremendously and I look for more of the same in the months to come. What confuses me is the De-coupling that is and has been going on. As U.S. numbers come out weak and talk of lower rates we see Emerging Markets currencies continuing to strengthen. Chile, Argentina,Brazil and Colombia all strengthened against the dollar this week. Is this to continue? Hhhhmmmm..... I am not so sure BUT, I am not willing to go against the trend. Some of the trades I currently like (although do not necessarily have on at the moment) are:

1. Look for lower rates in Brazil. The CB has taken a break from cutting recently but in the current environment I find it hard to believe that they will raise rates. Currently the DI fis is officially at 11.25% (but traditionally trades below there) with the Jan 09 yielding 12.10% (this is a simply vanilla IRS fixed/floating). Earn 12.10% while paying away 11.25% provides substantial positive carry. I would suggest keeping the size on the smaller side so that you do not get "stopped out" by a margin call.
2.Lower rates in the U.K., and a steepening curve like what is occurring in the U.S. They seem to be showing the first sign of buckling with the Sub-Prime mess. This week they kept rates on hold, but their currency has been under pressure for a few weeks and I think that it is a sign of perceived rate cuts in the coming months.
3.A stronger dollar. I know that I have been saying this for a while, but I still think (hope and pray) that a stronger dollar is in our short term (3-6 months) future.
4.Lower U.S. rates. This is a pretty easy call. I think over the next 1-2years we will be looking at some pretty slow growth here in the U.S. With this slow growth will cone some signs of a recovery and with those signs some spikes in interest rates as the market perceives the situation as being over. This will result in a difficult trading environment in the coming months.

Given my forth point I think it is very important to trade from a shorter term perspective. Also trade slightly smaller size then usual IF trading (like myself) abit longer term.

Good Luck and Good Forex Trading