Foreign Exchange forecast 7 August 2020

covering USD Index, EUR/USD, GBP/USD, USD/JPY, GBP/EUR

USD Index	LT-M	MT-W	ST-D
93.10 (93.39)
Trend	↓ (↓)	↑ (↑)	↑ (↓)
% Risk Weight	19 (20)	8 (6)	40 (14)
Allocation	50% (50%)

Daily risk weight has run up to 40 with Weekly at low risk turning up and Monthly still in downtrend. Not a clearcut case but opens for a mild bearish divergence between Short and Medium term risk. This could happern with a strong dollar decline although the Weekly appears to not allow that right now. Ideally a new low for the USDollar index before a slightly longer pause.
A perpetual 50% cover of dollar receivables is still the correct strategy.

7 August: Our hedging strategy no longer demands a trading like approach until such time that the strategy requires significant change. We will follow this apparent start of a longer term trend in a bi-weekly update.
The Dollar index peaked in Jan 2017 at 1.0380, dropping to 89.05 13 months later in Febr 2018, then followed by a largely manipulated ‘dollar is strong’ psychology peaking in March 2020 at 1.0300. Even though a correction or consolidation between 92 and 94 is likely, the USD dollar looksweal long term. Medium term near oversold risk weight is likely to develop divergence several times and because the US Dollar now also looks to develop a secular bear market, we are likely to eventually witness more long term weakness similar to the 1970’s trend. As trading conditions ar being adjusted along the way the right hedging strategy at thisd moment remains continued 50% cover of forward long dollar risk against all other major currencies.

EUR/USD	LT-M	MT-W	ST-D
1.1838 (1.1785)
Trend	↑ (↑)	↓ (↓)	↓ (↑)
% Risk Weight	77 (77)	91 (90)	63 (71)
Allocation	50% (50%)

The USD Dollar shows the same picture against Euro as the Index does although the Euro has a slightly stronger feel to it to confirm we may be in for fresh rally into 1.20+. The strategy to stay with a perpetual 50% dollar receivable cover is proably still the better one as economic risk and future trade may weigh on the opposite side of dollar receivables. No Change.

7 August: The US Dollar has weakened about 10% against the Euro since the March 2020 peak. This is now the secular bear market we have been expecting for a long time and we are now close to breaking a 9 year Euro downtrend. We stay with our low risk strategy of keeping a perpetual 50% cover on dollar receivable risk whilst changing trading conditions are likely to follow the dollar’s path and reduce long term currency risk. No Change

GBP/USD (Cable)	LT-M	MT-W	ST-D
1.3080 (1.3050)
Trend	↑ (↑)	↑ (↑)	↓ (↓)
% Risk Weight	63 (62)	89 (87)	70 (87)
Allocation	50% (50%)

GBP has strong long term overhead resistance at the 1.35 handle. Cable also doesnt appear finished but the resistance may be the trigger for our Sterling weakness objective versus Euro. For now the same Dollar hedge strategy should be applied as for Euro and the Index. No Change.

7 August: For now Cable appears to follow the general weaker dollar trend. GBP carries more risk technically but continues to favor a 50% dollar risk hedge. No Change.

USD/JPY	LT-M	MT-W	ST-D
106.50 (105.90)
Trend	↓ (↓)	↑ (↑)	↓ (↑)
% Risk Weight	52 (50)	28 (20)	88 (45)
Allocation	50% (25%)

Dollar/Yen Short term is now bouncing against the narrow range between 106.50 and 108.00 that developped during June and much of July. The potential bearish divergence calls for an increase of dollar cover to a perpetual 50% from 25%. The picture is not clear enough to go larger given the shape of the monthy price since 2017, but the feel is for a weaker dollar/yen to develop overe time.

7 August: As we have been saying for a while, the Japanese Yen is following the dollar, hence dollar Yen moves relatively little. With ST and MT risk weight turning up this week we continue to hold a marginal long dollar hedge of just 25%. Essentially meaning that risk of yen weakening against other major currencies is the more likely Longer term risk scenario. No Change. Corporate transaction hedge strategies usually require a limited amount of cover even is the market looks very strong in the opposite direction. This is just being prudent as opposed to opportunistic. Economic currency risk management requires a different currency type thinking and is totally dependent on changes to the corporate business model.

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GBP/EUR	LT-M	MT-W	ST-D
1.1055 (1.1060)
Trend	↓ (↓)	↑ (↑)	↓ (↓)
% Risk Weight	36 (35)	25 (22)	53 (65)
Allocation	80% (80%)

GBP/EUR looks to be manipulated towards a low risk supported exchange rate. If successful GBP could turn higher developing a similar broadening pennant looking very bearish as is the case with S&P. For now we prefer to hold our strategy where expect GBP to continue weaker in the Long term. No Change.

7 August: It could take anywhere from 2 years to 5 years, but out channel objective of 90.00 remains the best first objective. The current level around 1.10 is still well above any stronger intermediate support hence no change to remaning at least 80% covered on GBP receivables versus Euro or the opposite (perpetual 20% cover only) on GBP payables.