Foreign Exchange forecast 8 May 2020. A rigged market

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

USD Index	LT-M	MT-W	ST-D
100.29 (100.29)
Trend	↓ (↑)	↓ (↑)	↓ (↑)
% Risk Weight	50 (55)	55 (60)	50 (73)
Allocation	50% (50%)

As stated a few weeks ago, this completely rigged market which always seemed impossible to manipulate due to sheer size, has become a victim or maybe even a beneficiary of directionless movement over the past year or so. The only major currencies maybe finding their own turf are GBP, Yen and CHF. Hence the call for caution with a max 50% hedge. The index has gone sideways for a month in a narrow 2% range with 3 throughs and 3 peaks, now in a minor downtrend. Some smart macro analysts like Raoul Pal look for a very strong dollar on fundamental grounds and because Europe is losing it. Bit surprising with Europe showing a much stronger Debt to GDP ratio, but maybe that isn’t macro enough. Technically, across time frames, the index is not looking strong especially with a clear bearish divergence on weekly risk weight already 7 weeks ago. No more than a 50% neutral hedge.

Previous 24 April: The currency markets show lackluster performance within a less than 2% range over the past 4 weeks. The spell of strong swings that started in march took 2 weeks to calm down. Due to increased uncertainty and total lack of consumer confidence it is hard for international businesses to even begin to understand where, how or even ‘if’ this will end anytime soon. Fiat currency is dead in our view and the only solution is an out of the box well crafted redesign of our monetary system. Technical analysis tools will still show the way but short term events are extremely disruptive and can or will turn opinion and direction in a matter of hours or even minutes. The Long term technicals still look very vulnerable for the greenback, but one tweet or mainstream media suggestion can turn markets upside down without warning. We gently stay with a good practice risk management approach by covering exposures at 50%. The only exception being GBP as discussed below.

EUR/USD	LT-M	MT-W	ST-D
1.0830 (1.0819)
Trend	↓ (↓)	↓ (↓)	↓ (↓)
% Risk Weight	35 (35)	28 (30)	35 (25)
Allocation	50% (50%)

Raoul Pal, who is a very outspoken and bright maco economic thinker just said in a broadcast on May 8 that if Euro breaks 1.0770 there is little stopping it from returning to nearer the 2000 levels. We cannot see where the 1.0770 level comes but with monthly weekly and daily risk at close potential bullish divergence trigger levels if that break of 1.0770 or the recent low tick at 1.0636 occurs, the likilyhood, technically of a dollar drop is a great deal móre likely. And in terms of macro economic, the USA is certain to print dollars to infinity whereas Europe appears more cautious. The Karlsruhe ruling on ECB independence proves that point and raises a few ears. We stay on a very neutral and risk responsible 50% hedge. Speculation on where this market goes short term seems unwise. No Change.

Previous 24 April: The April triangle price formation, as clearly visible in the daily chart, looks like it wants to reverse the recent dollar uptrend. As all time frames are down this is not a moment to speculate but stay with a 50% risk cover on dollar long transaction exposures. especially in alternative media there is a battle going as to why the dollar should remain strong and as promoted by the US government or at least the President. Unfortunately we do not have enough reliable data where the balance of currency power lies. What we do know is that the USA is not in any better shape of managing its budget than Europe. We envisage a Corona plan that can return trust in our monetary system which we discuss in our Precious metals blog.

GBP/USD (Cable)	LT-M	MT-W	ST-D
1.2390 (1.2350)
Trend	↓ (↓)	↓ (↑)	↓ (↓)
% Risk Weight	50 (50)	55 (55)	33 (40)
Allocation	50% (50%)

A very uneventful 1.5% trading range for a few weeks now ending at 1.2390 on May 8. How the UK will fund itself out of this pandemic will be a serious challenge, being virtually bankrupt. The UK may well allow or be forced to let rates go up. The long term risk weight for cable is still trending down whilst weekly turned down from up at the same weight risk level but that happens in a very much sideways price range, confirming potential dollar weakness. Thus we stay in a neutral risk hedge position.

Previous 24 April: The market is beginning to notice how badly the UK is affected by the relatively slow introduction of lock down measures and how the present situation uncovers real poverty in England. Great Britain outside the European Union whilst still a paying member (for how long?) is in very poor shape. Gordon Brown’s extensive detachment from Gold reserves at near 20 year historic lows can and probably will prove to be one of the biggest risk management mistakes and may put the UK in rearguard recovery action fight. Cable may still do a little better than the USdollar but this is one to watch. No Change

USD/JPY	LT-M	MT-W	ST-D
106.60 (107.45)
Trend	↑ (↑)	↓ (↓)	↑ (↓)
% Risk Weight	51 (50)	52 (60)	15 (32)
Allocation	50% (50%)

Dollar Yen lost a little bit more ground than other dollar fx relation ships due to the perceived industry protection sounds from the Japanses government. Otherwise the technical picture is not clear and looking at daily risk having turned up calls for a slightly higher dollar yen in the next few days. Stay risk neutral with 50% hedge on transaction exposures.

Previous 24 April: Japan is reducing its economic exposure to China and the countries huge debt is largely an internal exposure. A $5.5 Trillion economy with 126 million population and a public debt at 200% is in itself frightnening but as it is largely financed by the Japanese tax payer the effects of a monetary reset, if that happens, are yet to be discovered. Japan’s 765 tonnes of gold reserves are not nearly enough to reduce the debt to gdp ratio to a normal level if the currency depreciates along the numbers projected for Europe and the USA. But maybe it will suffice with a policy of robbing Peter to pay Paul if Japan devalues by the same margin as other major fiat currencies. The whole situation is very uncertain and until we start seeing some major shifts in consumer behavior, corporate and government policy business models, we cannot be but very careful in our currency risk management approach. No Change

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GBP/EUR	LT-M	MT-W	ST-D
1.1415 (1.1396)
Trend	↓ (↓)	↓ (↑)	↓ (↑)
% Risk Weight	56 (60)	57 (54)	55 (55)
Allocation	80% (80%)

We want to remain much more cautious at a time where the UK is having to battle very much on its own. Risk weight turned down in all time frames whilst price remained static around the 1.14 handle. We still see this technical picture as being more vulnerable for GBP and stay with a 80% hedge on GBP receivables.

Previous 24 April: The past week saw a decent 1,5% drop in the GBP/EUR rate, a subsequent inexplicable 1% rally followed by an end of the week price settlement that is marginally lower at just under the 1.1400 handle. In our view the UK is in a fight for Long term survival which they will probably manage, but it may be painful along the ride. We must remain very cautious and prefer to stay with a strong hedge on any, more limited perhaps, exposure of GBP receivables. No Change at 80% cover