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FX Technical Strategy

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Dollar recovery to broaden

Wed, Apr 30 2008, 11:32 GMT
by Lloyds TSB Financial Markets Economic Research Team

Lloyds TSB Financial Markets

Market overview

The bullish dollar and sterling scenarios discussed over the past few weeks continue as the inversion of market trends cascade the financial markets. As the broader market latches on to the prospects for a sterling and dollar to recovery, a cautious approach has to be maintained in the very near term. However, the orignal signals that implied a recovery was imminent remain broadly in place. The final piece of the jigsaw discussed in last week's document was the potential for a fall in precious metals and gold has duly breached the $900 barrier with cracks appearing in a wider range of commodities. Clearly this has implicatons for the CAD,NZD, NOK and AUD going forward.

Whilst the medium term trends point to dollar and sterling strength against the majors (most notably against the previously strong yen, Swiss franc and euro) there are still some elements that need to fall into place to increase the momentum. Firstly, the commodity reversals could do with broadening to the energy sector. Secondly, the current retracements in precious metals need to develop into full blown downward trends rather than testing the lower end (of an albeit wide range) and finally, whilst the bond yields are set to rise further, a short term retracement needs to be factored in given the pace of the recent moves.

The emerging dollar trend is very likely to be touted as the start of a long term recovery although paradoxically you may note a number of participants who were previously bullish on the dollar switch to bearish in the next week or so. Whether this is a medium term or long term recovery will appear indistinquishable at this stage (if indeed the dollar does continue to recover). However, I have not changed my long term bullish view of the yen and Swiss franc and fully expect the equity markets to reverse the gains as we look beyond the three month time horizon.

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Published on  Wed, Apr 30 2008, 11:35 GMT