FX Technical Strategy Weekly
Equities on the Brink
Market Overview
The euro is under increasing pressure. The past few months have seen equities range trading and, although there have been positive signs to note, the equity markets continue to look vulnerable to further falls. With major supports approaching, the risk is developing for a breakout trade to the downside. DAX futures have managed to recover three times from 4066 support, however this coming fourth test does does not look likely to hold. Hopefully I am wrong and this is simply a bear trap, but for the moment the strategy for this week has to reflect the downward trending prospects for the euro and increased safe haven buying of dollars. Interestingly, this is happening to the exclusion of the Swiss franc and Japanese yen, implying a break-down of the recent inter-market relationships. In this vein, gold is posed to break over $1000, traditionally a bearish dollar signal, but as gold is taking on the form of a safe haven currency, the relationship is less significant.
The yield spread between two year treasuries and two year European bonds continues to narrow towards 0.00% and is likely to go negative in H2 2009. Coupled with the recent break of supports in euro dollar, this points to 1.2330 and potentially lower in the coming weeks.
Euro/US dollar
Downside stops have been hit. The lower support line after weeks of range-bound price action has broken, hence 1.2329 is the natural target and may not be the limit to the coming trend. Sell a bounce to 1.2750 on stops at 1.2820.
US Dollar/Japanese yen
The prospects for a base continue to build. Move stops up from 88.40 to 90.80. A break of 95.05 would signal a major base.
Sterling/ US dollar
Stops at 1.4370 have been hit. For the moment the pressure from equities is the bigger burden for sterling and is likely to break back below 1.4000. Sell into the gap at 1.4350, stop 1.4420, target 1.3800.
Euro/Japanese yen
The market is still in a range which has existed for a long while now. Given the close proximity of support, look to sell euros at the current 116.10, target 110.00, stop 118.42.
Australian dollar/US dollar
Stops at 0.6480 have been hit. This week we are going to try the reverse tack and sell the Australian dollar looking for a break of the key support at 0.6309. Sell the current 0.6405, stop 0.6520 target 0.6000.
Euro/Sterling
Week on week the euro correction ran higher than expected. The overall bias remains bearish however, with the risk for a retest of the 0.8832/62 support area. Sell euros at current on stops over 0.9010.
Euro / Swiss franc
The trendline from October 2008 has been breached and, whilst the broader market continues to range trade, this could be the first significant break-out signal. Sell euros at the current 1.4802 looking for 1.4660 initially and possibly 1.4322 if equities maintain a downward direction. Stop on a two day close over 1.4820.
US dollar/ Polish zloty
The upward trend rate has been sharp. Unwinding zloty gains is a much quicker process than the reverse. Given the speed of this move, it may not be complete until a break of 4.00 occurs with 4.09 the next target. Unfortunately volatility is high hence holding a position is difficult. Buy dollars at the current 3.8659, stop 3.8400 target 4.0850.
Lloyds TSB Bank
http://www.lloydstsbfinancialmarkets.com
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