FX Technical Strategy Weekly
Cautious Dollar Strength
Market Overview
In last week's release, we discussed the potential for extended short strength for the US dollar, although the context for this remains against a long term bear market. Given the speed of the market's move, the potential for an overshoot is large and picking exact levels for a turnaround becomes more problematic. However, the targets for euro dollar were at 1.4722 and whilst the squeeze continues, it is difficult to stand in the way of dollar strength and an extended move into 1.4500 support can not be ruled out from here.
The signs that argue for caution are not necessarily the extent of the dollar's appreciation, but the underlying potential for another downleg in equities and the softening of US bond yields. As with everything in the financial markets, timing is key. Gold remains an important canary for the dollar's fortune. Whilst an initial bout of short covering and buying has fizzled out, the $750 support level should attract some longer term players into rejoining the trend. Given that the signals have moved from a clear dollar buy to mixed, the currency pair that led the way upwards (dollar yen) should be monitored as the first to lead the dollar back down. At the very least it should stay defensive, allowing further downside for euro yen.
US 2 year yields: The risk here still favours the downside together with equities. Whilst this is a relative move and European yields remain soft, the concept that the dollar is out of the woods appears premature despite the extension of the recent trends.
Euro/US dollar
Most of the dollar trend was captured here. Turning the view at 1.4722 was premature, but in a move of this magnitude, picking the bounce point was always going to be difficult. 1.4410 is the next target where a renewed attempt will be made on stops below 1.4380.
US Dollar/Japanese yen
Long stops have been hit at 109.65. Instinct says this is going to decline although there is little evidence to justify it from the chart. At the risk of getting whipsawed, try a sell at the current 110.00 with a stop at 110.70. Alternatively, a safer strategy is to sell this through 109.00 or on a squeeze to 111.00.
Sterling/ US dollar
The 1.8900 level was hit and the intra-week attempt to pick a low was quickly reversed out. 1.8500 is the next major support and as the rebounds have been relatively weak, directionally the risk points there. Below 1.85 there is not much support until 1.8180.
Euro/Japanese yen
The euro sell zone at 165.00 fell short, but the risk remains for the 160.55 target and then 159.64 level below that. Stops over 162.20.
Australian dollar/US dollar
The 0.8610 target has been hit. An intra-week attempt to reverse this move is currently coming unstuck. However, risk/reward favours a bounce in this with targets back up at 0.8800. If the low at 0.8597 remains into Friday, buy the Australian dollar. Else the next main support is at 0.8516.
Euro/Sterling
Despite the initial break out signal and the potential for broad euro weakness, this pair remains range-bound. The view is neutral until clearer signals emerge. 0.7985/ 0.7833 are the key levels.
US dollar / Norwegian krone
Move stops from 5.34 to to 5.38. Targets remain at 5.50 although this could be the final squeeze.
US dollar / Canadian dollar
The extended target at 1.0760 has not been hit. However, the price action here resembles a bullish flag, confirmed by a break of 1.0660. Failure to breach this level by Friday and the risk reverts to the downside, but for the moment the trend is bullish.
Lloyds TSB Bank
http://www.lloydstsbfinancialmarkets.com
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