FX Technical Strategy Weekly

Dollar Recovery to Broaden

Market Overview

The bullish dollar and sterling scenarios discussed over the past few weeks continue as the inversion of market trends cascade the financial markets. As the broader market latches on to the prospects for a sterling and dollar to recovery, a cautious approach has to be maintained in the very near term. However, the orignal signals that implied a recovery was imminent remain broadly in place. The final piece of the jigsaw discussed in last week's document was the potential for a fall in precious metals and gold has duly breached the $900 barrier with cracks appearing in a wider range of commodities. Clearly this has implicatons for the CAD,NZD, NOK and AUD going forward.

Whilst the medium term trends point to dollar and sterling strength against the majors (most notably against the previously strong yen, Swiss franc and euro) there are still some elements that need to fall into place to increase the momentum. Firstly, the commodity reversals could do with broadening to the energy sector. Secondly, the current retracements in precious metals need to develop into full blown downward trends rather than testing the lower end (of an albeit wide range) and finally, whilst the bond yields are set to rise further, a short term retracement needs to be factored in given the pace of the recent moves.

The emerging dollar trend is very likely to be touted as the start of a long term recovery although paradoxically you may note a number of participants who were previously bullish on the dollar switch to bearish in the next week or so. Whether this is a medium term or long term recovery will appear indistinquishable at this stage (if indeed the dollar does continue to recover). However, I have not changed my long term bullish view of the yen and Swiss franc and fully expect the equity markets to reverse the gains as we look beyond the three month time horizon.

Euro/US dollar

Over the past few weeks I have been looking for a change in trend. Clearly this was not going to be smooth given the extent of the prior move. However, the bias from here is for 1.54 and then 1.50 despite my long term bearish view of the dollar. Only a close over 1.5760 would imply a reversal.

US Dollar/Japanese yen

Move stops up from 99.80 to 102.80. Targets are at 106.00.

Sterling/ US dollar

Sterling and the dollar remain in trends else where, but for the moment the balanced outlook continues. In the next few weeks a trend could become a prospect , but for now the bias is for a range..

Euro/Japanese yen

At the top end of the range here with the resistance line at 165.23 holding. Opportunities remain short term in nature, with a bias towards 160.00 this week. Only a close over 165.30 would change the bearish euro focus.

Australian dollar/US dollar

Stops were hit at 0.9440. To break the high and retrace so quickly is normally indicative of a longer term top. Whilst we are broadly at the same levels of late February, the stance here favours a marginally bearish strategy with 0.9385 a sell level on stops over 0.9410. A break of the support line at 0.9225 would be a good confirmation sell signal.

Euro/Sterling

0.8100 was assumed to be the top of the market with the strategy to sell euros from then on. Targets at 0.7900 have been exceeded and although there is scope for a rebound, the next objective is at 0.7700. Stops are at 0.7935.

Euro / Canadian dollar

A potential topping formation here is triggered through a break of the support zone at 1.5720. Targets are at 1.5500 on stops over 1.5860.

US dollar / Swiss franc

A key element of a broad dollar reversal has been a weakening of the Swiss franc and yen against the dollar. Last week we saw the anticpated rebound and from here the dollar should build on gains towards 1.05 and then 1.08. Stops are at 1.0170.

Lloyds TSB Bank
http://www.lloydstsbfinancialmarkets.com

Disclaimer: Any documentation, reports, correspondence or other material or information in whatever form be it electronic, textual or otherwise is based on sources believed to be reliable, however neither the Bank nor its directors, officers or employees warrant accuracy, completeness or otherwise, or accept responsibility for any error, omission or other inaccuracy, or for any consequences arising from any reliance upon such information. The facts and data contained are not, and should under no circumstances be treated as an offer or solicitation to offer, to buy or sell any product, nor are they intended to be a substitute for commercial judgement or professional or legal advice, and you should not act in reliance upon any of the facts and data contained, without first obtaining professional advice relevant to your circumstances. Expressions of opinion may be subject to change without notice. Although warrants and/or derivative instruments can be utilised for the management of investment risk, some of these products are unsuitable for many investors. The facts and data contained are therefore not intended for the use of private customers (as defined by the FSA Handbook) of Lloyds TSB Bank plc. Lloyds TSB Bank plc is authorised and regulated by the Financial Services Authority and is a signatory to the Banking Codes, and represents only the Scottish Widows and Lloyds TSB Marketing Group for life assurance, pension and investment business.