Yen and Swiss to weigh on the market...
Wed, Nov 14 2007, 10:53 GMT
by Lloyds TSB Financial Markets Economic Research Team
Market overview
As expected, the yen and swiss franc have strengthened against the US dollar and the capacity for further gain remains as we move into the new year. Dollar yen targets stay at 108.00 (clearly implying a break of the major support at 109.00) and then 102.00 into year end. Dollar swiss targets are at 1.08 where talk of parity will commence.
I also expect the yen and swiss currencies to remain broadly strong with notable moves against the commodity currencies. The prospect of the end of the 'carry trade' has to be seriously considered from this point and the implications it would have on emerging market currencies. Whilst, in the past, the death of the carry trade had been greatly exagerated, the missing piece in the jigsaw was the possibility of a correction in the Asian stock markets. This prospect remains very real with the Hang Seng recently completing a major head and shoulders top and conforrming to my broader based bearish view of global stock markets. The net effect of this has seen profit taking on short dollar positions and whilst, I see further room for euro dollar to trade towards 1.47 and cable back up towards 2.12, these views are somewhat secondary compared to my preferred trades of broadly buying the yen and swiss franc.(note the euro yen and euro swiss charts enclosed)
Euro sterling breached key resistance at 0.7020 and this put the focus on a short term trend with targets at 0.7200. Whilst the broad view of this currency pair is range-bound, this would also still be the case if we were to hit this current objective. Clearly a close back through 0.7020 would be the main reversal signal.
One very consistent technical set-up has been in sterling yen where the major head and shoulders reversal continues to pan out. Given that we are in the final stages of this major topping pattern, the yen should remain under-pinned with targets at 220.00 into year end and on towards 218.00 in Q1 2008.
