Foreign Exchange forecast 27 May 2020

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

USD Index	LT-M	MT-W	ST-D
96.95 (98.80)
Trend	↓ (↓)	↓ (↓)	↑ (↓)
% Risk Weight	40 (50)	45 (57)	6 (25)
Allocation	50% (50%)

The index lost 1.5%, which was minimized by the weakness of the Yen but it shows a trend that is still in force. Given the size of the relatively determined direction down since 3 weeks, we should see some bullish divergence in the daily risk weight before a bear market rally or reversal is expected. We would say another 2% in to the high 94 handle is quite likely over the next few weeks. No Change in exposure management risk policy in keeping 50% long dollar exposure covered.

27 May: This week the USdollar index turned down in all time frames and now trades at the low end of that 10 week 2% trading range. Since the 1980’s the broad support level is around 80 and the resistance at 120. We have been smack in the middle for quite a while and we still believe the technicals point towards further weakness. Several important market narratives however sees a huge bull for the dollar as the USA has a stranglehold of foreign US Dollar debt. The longer it takes for the dollar to develop a stronger downtrend following the 2008-2016 primary cycle advance, sentiment could turn bullish again. Until our technical tools signal either way, the least risk remains a 50% cover on transaction risk exposure. No Change

EUR/USD	LT-M	MT-W	ST-D
1.1278 (1.1020)
Trend	↑ (↑)	↑ (↑)	↓ (↑)
% Risk Weight	50 (40)	43 (30)	91 (70)
Allocation	50% (50%)

Most market analysts are mistified. What’s the future of the petrodollar? Will Europe manage to hold it together? Isn’t the real pandemic an economic one, with debt having spread everywhere and rising rapidly? As the Euro has gained 2%, or rather the dollar has lost 2%, more or less, across international trading boards, the technical scenario today is bullish for EUR. Especially the Longer term time frames look firm again for the Euro, but with trade liquidity still lacking pace it will be hard to predict a level in three or 6 months time. Right now the Euro looks to build momentum for a move towards the peak resistance line at around 1.1850. We hold our continued 50% receivables cover on long dollar risk. If the dollar makes a final break, up or down, the market will adjust itself as it always has, via trade negotiation and or protectionist measures. No Change.

27 May: The Euro turned up this week in all time frames following the general dollar direction change to lower. The same reasoning applies as for the dollar Index itself. Although the Euro shows even more strength and potential to reach the March highs of 1.1500. Resistance through 4 tops starting 2007 is at 1.1900. We stay with 50% cover until further evidence show a clearer way forward.

GBP/USD (Cable)	LT-M	MT-W	ST-D
1.2640 (1.2314)
Trend	↑ (↓)	↑ (↓)	↓ (↑)
% Risk Weight	52 (50)	50 (44)	92 (45)
Allocation	50% (50%)

GBP was also stronger in spite of or even thanks to Brexit worries. Covid has hit the UK harder in Europe than all other countries of size except Belgium. The same dollar strategy applies. it is just right to have about 50% long dollar risk cover for the time being.

27 May: Only our daily time frame risk weight turned bullish this week. GBP short term strength therefore has a lower confirmation level. Yet our Weekly time frame has potential to turn up again following the March bulish intermediate divergence break to a low of 1.1400. Otherwise long dollar transaction exposures should remain covered at 50% until better signals of primary trend direction become visible

USD/JPY	LT-M	MT-W	ST-D
109.45 (107.80)
Trend	↑ (↑)	↑ (↑)	↑ (↑)
% Risk Weight	56 (53)	62 (55)	92 (78)
Allocation	50% (50%)

Dollar Yen, as mentioned last week did the opposite again and rallied 1.5% against the general dollar downtrend. The reason can be found in further monetary accommodation on an already stretched 250% debt to GDP ratio. All risk weight trends are up and Japan would not mind seeing a weaker Yen to stimulate exports and compete with the Chinese. Because of the technical behavior and fundamental uncertainty we would favor letting the 50% long dollar cover being absorbed by the actual spot movements and run down this position for the next three months to around 20-25%. The forecast trend therefore is one of a developing weaker yen in international fx markets.

27 May: Dollar yen, as it often does, is not moving in tandem with the other major dollar pairs and the technical outlook is not clear either even though all risk weight time frames are pointing up. The best strategic position is to remain at 50% cover as international pricing will adjust to allow compensation for a much weaker yen if that were to happen

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GBP/EUR	LT-M	MT-W	ST-D
1.1213 (1.1170)
Trend	↓ (↓)	↑ (↓)	↓ (↑)
% Risk Weight	48 (53)	45 (45)	53 (20)
Allocation	80% (80%)

A 40 year down trend was temporarily paused for 3 years and looking at that 40 year trend we expect another 20 cent drop of GBP vs Euro over the next 3 or 3 years. The technicals are not strongly pointing in that direction but they certainly do not oppose this (strong) possibility. Quite funny looking back at the 1992 devaluation of GBP, more or less at the end of a primary Sterling down move. The term ‘whatever it takes’ wasn’t invented yet and the BoE could be and was broken by pure market speculators like Soros Quantum fund. GBP’s move in March 2020 wasn’t much smaller than the devaluation move in September 1992. Maybe it’s in the air, but something says a wave of interest rate moves may be in the making. ‘Whatever it takes’ can only lasts as long as the strongest House of Cards and in every House of Cards there is a unforeseen element of weakness. No Change.

27 May: GBP technically still shows the weakest hand although the daily short term time frame has turned up. With Medium and Long term still in a down trend our focus is still for a weaker GBP vs Euro. Sentiment more in favor of GBP can change of course but fundamental indicators are not looking good for the UK economy outside of Europe. We stay with our 80% cover on long GBP transaction exposures