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Six month FX view

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Three and six−month FX view

Fri, Nov 10 2006, 11:27 GMT
by Nicole Elliott

Mizuho Corporate Bank

Three and six-month outlook for JPY

Comment: Relatively quiet FX markets over the last six months have postponed but not altered our outlook for generalised US dollar weakness. The Yen is likely to continue to lag moves in other currencies, at least for Q1 2007. Dollar/Yen completed a ‘spike high’ in October (119.88) marking an interim top for this pair, and we now expect a fairly sharp decline to 114.00 within the next six weeks. Allow for consolidation here until the end of this year, but remember that thin market conditions at year-end may mean moves are faster or extend beyond what we have pencilled in. Then another drop to the 109.00 area followed by a little more consolidation in Q1 2007, then down again to 107.00/105.00 by the end of March 2007.

A weekly close above 121.50 would force us to review review.

Three and six-month outlook for EUR

Comment: Having spent the last six months in a relatively tight range, complacency has probably set in. We feel this is misplaced and that there is a good chance of a rally around year-end. A sustained break above increasingly important resistance at 1.3000 targets 1.3500 short term, just shy of the all-time high at 1.3670. Expect prices to hover nervously around here in Q1 2007 as markets prepare to move even higher. In Q2 2007 we expect the Euro to reach a high somewhere between 1.3700 and 1.4000, maybe but briefly quite a bit higher.

A monthly close well below 1.2500 would force us to review.

Three and six-month outlook for EUR/JPY

Comment: There is nothing in the chart pattern to suggest that the very long term trend to a stronger Euro versus the Yen is about to change. On the contrary, after wasting so much time going sideways in 2004 and 2005 there is a chance the rally will actually accelerate. The move should be mirrored in many other Yen crosses denoting Yen weakness rather than Euro strength. A weekly close above 150.50 should trigger a short squeeze to 154.00/155.00 very late in 2006. Some time in Q1 2007 we favour another sudden rally towards the October 1998 high at 164.00. The second quarter of 2007 will probably be dominated by a lot of sharp big swings roughly between 150.00 and probably no higher than 170.00.

A monthly close below 145.00 would force us to adjust.

• Three and six-month outlook for JPY
• Three and six-month outlook for EUR
• Three and six-month outlook for EUR/JPY

Published on  Fri, Nov 10 2006, 11:33 GMT