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FX Technical Strategy

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Could equities spark a dollar sell off?

Wed, Dec 10 2008, 11:56 GMT
by Lloyds TSB Financial Markets Economic Research Team

Lloyds TSB Financial Markets

Market overview

The bullish dollar scenario has weakened. Whilst a major sell signal at has not yet ocurred, the evidence is shifting towards a weaker dollar. As market volumes continue to thin and intermarket relationships (equities and the yen) diverge, the normal clues to the next big move are less reliable. Perhaps this is a message that this historic year will close with a drop in volatility and range as a contrast to the price action for the rest of the year. However, thin markets are more notorious for large moves so a year end squeeze is still a latent risk.

Given that a surprise would take the form of a commodity and/ or stock squeeze, the charts for equities remain of interest. Once again they have pulled back from the brink and staged a solid rally. With core equities down between 30-50% year-to-date there is a big dent to fill, but the current sentiment continues to ignore the short term resilience. The price action appears to be base building and if the rally can be maintained over the coming sessions, the pressure for inaction will be reversed. It is fair to say that the market may not be aggressively buying commodities, but the time to be selling is passing. As a refelction of this, the Australian dollar has held above a key stop at 0.6240 for the last few weeks and has begun to move higher.
Again this is still tentative, but should be closely monitored for signs of acceleration. The chart of Aussie Swiss franc is hovering below a major trigger level at 0.8182. Again this would suggest a base is building which could spill over into the other commodity currencies and perhaps even sterling.
Euro sterling is clearly under upward pressure and a move towards 0.8800 is expected.
Against the dollar, traction is still limited and a retest of 1.4570 support can not be ruled out. However, if the backdrop continues to improve, sterling will very quickly look under valued.

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Published on  Wed, Dec 10 2008, 12:00 GMT