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Six month FX view

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Six month FX view

Tue, Nov 13 2007, 16:01 GMT
by Nicole Elliott

Mizuho Corporate Bank

Six Month Outlook for EUR

Comment: The Euro is retreating from an all-time high at 1.4753, which is higher than 1.4550 - equivalent to the Deutschemark’s strongest in March 1995. This is seen as much-needed correction and consolidation which should last for at least four weeks. An initial drop to 1.4300 will probably shake out those who have only recently jumped on the bandwagon. A second and deeper drop to 1.3700 will probably shake-out all but the most die hard US dollar bears. Then the Euro should trade steadily higher, back up to 1.4750 and through here to 1.5000 towards the end of Q2 2008. Drifting back to 1.4550 by the end of next year. As is the case with generalised US dollar selling, if this turns into a frenzied rout we shall have to adjust our target higher (say $1.6750), then topping sooner.

A monthly close below 1.3650 would force us to review.

Six Month Outlook for GBP

Comment: Consensus opinion is that Cable will peak within the next four weeks and then move down steadily towards 1.9700 over the coming year. We beg to differ and are factoring in persistent US dollar weakness in 2008. The question therefore is the speed of the move because the sooner and the faster the pound makes new highs, the sooner it will top. Over the next few weeks we shall allow for correction and consolidation under last week’s multi-year high at 2.1162. Expect dips to 2.0500, where it will probably try and stabilise, prior to another downside probe. Below 2.0000 is unlikely. A ten cent move might not sound like a ‘dip’ but that represents just a 4.7% decline from last week’s high. In Q1 2008 we favour a series of very large price swings, roughly seven cents either side of 2.1000. Late in Q2 we favour another new high around 2.2000 before drifting back to 2.1200 by year-end. We must warn that so few have been aware of US dollar weakness that started in 2001 that they could all jump in late taking the greenback quickly to catastrophic levels. This Plan B would see Cable reach 2.4500 within 6 months and is currently not our favoured view.

A weekly close well below 2.0000 seriously postpones all of the above and forces a review.

Six Month Outlook for JPY

Comment: Topping activity over the last two months in Yen crosses means we have had to downwardly adjust our forecasts for dollar/yen. Rallies to 112.00/114.00, and probably no higher than 116.00, are seen as selling opportunities for a retest of 109.00 support within the next three months. A break below here targets 105.50, probably by the end of Q2 2008. During H2 2008 there is a chance of a massive collapse through the psychological 100.00 area to test 93.00/95.00, ahead of the all-time low at 80.00.

A weekly close above 118.00 would force us to review review.

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Published on  Tue, Nov 13 2007, 16:19 GMT