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FX Technical Strategy

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Oil required to keep FX moving

Thu, Feb 12 2009, 06:17 GMT
by Lloyds TSB Financial Markets Economic Research Team

Lloyds TSB Financial Markets

Market overview

The 'ultra-cyclical' sterling has had more than a decent bounce as conditions pointed to an oversold currency. The main question from here is can it continue to rally? Whilst sterling is experiencing a corrective retracement at the time of writing, the overall bias remains positive.
The reason for this lies in the firmness of bond yields, the bid nature of commodities and the extending rally in Chinese equities. As long as these factors continue on the current trajectory, the bias remains positive.

Clearly this scenario is supportive of the commodity currencies outright and negative the yen.
Last week after a period of hibernation, the dollar yen woke up with a start. Whilst in the short term the trend has stalled, the bias remains positive. As equities squeeze higher both the yen and dollar should weaken as the safe haven premium subsides. Commodties should have a magnification effect on this, but whilst the commodity rally broadens, oil continues to lag.

However, the sharp rally in the baltic dry index, (currently up another 159 points at 1974) may start to change sentiment towards oil, despite the obvious over supply situation. This is supportive of the Norwegian krone also which continues to exhibit signs of strength against the dollar and yen. However a push through $44.00 for crude oil could be that catalyst as pressure starts to build.

To push the commodity story along, platinum has finally cleared the $1,000 level and silver continues to lead the way higher. It is also worth watching sugar futures which have pushed through $13.00 and in sterling terms are close to record highs.

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Published on  Wed, Feb 18 2009, 06:40 GMT