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FX Technical Strategy

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Two out of three ain't bad

Thu, Apr 24 2008, 06:22 GMT
by Lloyds TSB Financial Markets Economic Research Team

Lloyds TSB Financial Markets

Market overview

The broad lack of trends over the past week, exacerbated by the thin markets, have given every reason to keep to the sidelines and maintain a defensive approach to the markets. Whilst euro dollar has traded into all-time high territory and may well squeeze further, I detect a shift in sentiment that could well see a broad dollar rally in the coming weeks, although my long-term view remains resolutely bearish on the US currency.

The reasons for my change in view have been mentioned over the past few weeks, but broadly speaking there are three ingredients to spark a dollar rally. Firstly, a rise in US yields and change in sentiment for short term interest rates, which we have been discussed in my bond technical weekly. Secondly, a recovery phase for equities and, finally, an easing of commodity prices.

Clearly the sticking point is the outlook for commodities and whilst I have been bearish/cautious for the precious metals market over the past few weeks, the range-bound price action continues to dominate. Interestingly, soft commodities are showing mixed signals and, whilst a few months back I was calling for broad rises, the trends have turned or are stabilising for an increasing number of soft commodities.

Whilst reasons for a rally are irrelevant if you do not actually see this translated in the price, I have also mentioned recently that the primary trend drivers, the yen and swiss franc have both turned against sterling and are gradually softening against the dollar. With sentiment on the US currency as it is, I consider a range to be a bullish signal. Next week should be very important as we should have confirmation from the commodity markets as to the next trend direction. With oil pushing record highs, the divergence in this asset class is becoming more pronounced, but at the very least, the situation has changed from clear trending price action that began in August 2007.

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Published on  Thu, Apr 24 2008, 07:57 GMT