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
93.39 (94.35)
Trend	↓ (↓)	↑ (↓)	↓ (↓)
% Risk Weight	20 (27)	6 (10)	14 (4)
Allocation	50% (50%)

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.

24 July: We remain bearish and cautious on the USD exchange rate folowing a 2 1/2% drop the past twp weeks. All USD Index time frames, incudling hourly, are in oversold territory, yet the same now applies as to other markets that are developing a new direction. For the USd Index to get oversold now requires at least the Medium term Weekly time frame to show bullish divergence. This will be weeks away so any short term correction up for the USD Index will be short lived. We still propose no change to maintaining a perpetual 50% long dollar exposure cover. This is the correct business risk strategy in a situation of substantial forward economic uncertainty

EUR/USD	LT-M	MT-W	ST-D
1.1785 (1.1655)
Trend	↑ (↑)	↓ (↑)	↑ (↓)
% Risk Weight	75 (65)	92 (87)	86 (93)
Allocation	50% (50%)

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.

24 July: The Euro showed relatively more strength than the USD Index advancing some 3.25% vs USD in the past 2 weeks. The same risk strategy applies here. Keep 50% of budgetted dollar receivables covered forward on a perpetual 6 months basis. If one draws a resistance line across the Euro peaks since 2007, current resistance is at 1.1835. If we break this 3 weeks in a row, the next objective could be in the 1.40 handle as a medium term equilibrium, give or take

GBP/USD (Cable)	LT-M	MT-W	ST-D
1.3050 (1.2790)
Trend	↑ (↑)	↑ (↑)	↓ (↑)
% Risk Weight	62 (50)	87 (70)	87 (90)
Allocation	50% (50%)

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.

24 July: All risk weight time frames are up with Monthly turning up at the neutral 50 level. Cable performed weaker than Euro with just strengthening 1.5%. The same stategy is still deployed keeping 50% perpetual cover on budgetted dollar receivables. Trend resistance since 2007 is at 1.3600.

USD/JPY	LT-M	MT-W	ST-D
105.90 (106.10)
Trend	↓ (↓)	↑ (↓)	↑ (↓)
% Risk Weight	50 (55)	20 (21)	45 (29)
Allocation	25% (25%)

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.

24 July: The Yen still appears to move with the dollar. A more stable dollar yen therefore may be expected hence a lower risk approach with just a mild 25% forward cover on long dollar/yen exposures in spite of all time frames showing a downtrend. The chart picture with a flag type formation could potentially even develop a higher dollar/yen with a lower dollar index. No Change

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GBP/EUR	LT-M	MT-W	ST-D
1.1060 (1.0970)
Trend	↓ (↓)	↑ (↓)	↓ (↑)
% Risk Weight	35 (35)	22 (25)	65 (20)
Allocation	80% (80%)

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.

24 July: GBP is moving in our direction showing further weakness vs Euro during the past 2 weeks. The recent drop from a short term peak at 1.12 is likely to finish at a lower level. Where we have indicated to expect a sub par level in the future we could pause nearer the recent March lows, but will await the Long term and Medium term risk weight to show intermediate bottoming action. The very long term objective basically follows the historic inflationary trend which indicate a 50 year flatter price channel objective of around 0.9000 and more agressive 20 year price history objective of 0.7800.