FX STRATEGY 8 October 03 This commentary reflects the views of the Wealth Management Group The views expressed in this publication are made on the basis of a -4 week outlook and may differ from our longer term views and forecasts from the Global Research function. Contents EUR USD Pg USD JPY Pg 3 AUD USD Pg 4 USD SGD Pg 5 GBP USD Pg 6 XAU USD Pg 7 Supplementary pairs charts Pg 8-9 Interest rate differentials and FX implied Pg 0 volatility Central Bank Monetary Policy Schedule Pg Appendix Pg Disclaimer Pg 3 Weekly performance of pairs October 03 to 8 October 03 EUR-USD USD-JPY AUD-USD USD-SGD GBP-USD XAU-USD -0.96-0.3-0.7-0.0 0.84.6 -.5 - -0.5 0 0.5.5.5 3 % A data-heavy week awaits Recent USD weakness appears to have taken a breather as a delay in Fed tapering increasingly appears to be discounted, in our judgment. We would not, however, rule out a little more weakness. Ultimately, we expect Fed tapering to support the USD. However, the path to this outcome remains uncertain. EUR-USD We remain bullish on EUR-USD as we believe there is sufficient momentum to continue driving the pair higher. USD-JPY We remain bearish on USD-JPY in response to crowded net long market positioning which pose the risk of short-term weakness. AUD-USD We remain neutral on AUD-USD. We believe the pair is likely to temporarily rise in the very short term before subsequently weakening once the rebound tapers. USD-SGD We are turning bearish on USD-SGD (from neutral earlier) as the pair has broken below both its 00 DMA and medium term support. Steve Brice Chief Investment Strategist Rob Aspin, CFA Head, Equity Investment Strategy Manpreet Gill Head, FICC Investment Strategy Adi Monappa, CFA Head, Asset Allocation Audrey Goh, CFA Investment Strategist Victor Teo, CFA Investment Strategist GBP-USD XAU-USD We turn neutral on GBP-USD (from bearish earlier) as price action suggests the pair is likely to remain supported for now. We remain neutral on gold as the Fed tapering delay-based rebound is likely to be only temporary. CORE PAIRS Short term Spot ( 4 weeks) Support Support Resistance Resistance EUR USD.338.354.380.40.48 USD JPY 94.00 96.00 97.6 99.0 0.50 AUD USD 0.930 0.950 0.96 0.975 0.995 USD SGD.8.30.36.45.5 GBP USD.585.600.68.630.645 XAU USD 80 50 35 360 40 SUPPLEMENTARY PAIRS* Short term Spot ( 4 weeks) Support Support Resistance Resistance USD CNH 6.056 6.068 6.093 6.00 6.6 USD ZAR 9.300 9.566 9.777 0.33 0.605 NZD USD 0.806 0.80 0.87 0.84 0.858 USD CHF 0.858 0.884 0.89 0.96 0.938 USD SEK 6.080 6.40 6.38 6.495 6.85 USD CAD.06.09.044.05.067 *SUPPLEMENTARY PAIRS - Going forward, we will maintain the EUR, JPY, AUD, SGD, GBP and XAU outlook while adding just key technical levels for the supplementary pairs
EUR - USD Key technical indicators and forecasts* TECHNICAL INDICATORS VIEW We remain bullish on EUR-USD as we believe there is sufficient momentum to continue driving the pair higher. RSI Stochastic MACD ADX Momentum KEY LEVELS Levels Importance resistance.48 Strong resistance.40 Strong Spot.380 support.354 Strong support.338 FORECASTS Consensus Q4 03.33 Q 04.3 Q 04.30 Q3 04.8 *Please see Appendix on Pg for explanation on technical indicators Performance EUR-USD was up (0.84%) over the previous week as the US employment report for the month of September was much weaker than the market had expected. This further supported rising expectations the Fed may delay tapering. In the Euro zone, the German business confidence survey was marginally weaker and overall PMI remained lacklustre, but it did not dent sentiment in the region. Technical analysis Major technical indicators, on balance, are neutral to bullish. We remain bullish on EUR-USD as the pair has shown increasingly bullish price momentum action. It looks well set to clear its previous key retracement level (6.8% of May 0-July 0 correction) at.38 and head to the.40 region. Slightly overbought readings are a risk, but we believe this can be overcome if momentum continues to strengthen. We would review our outlook if the pair fell below.354. Key signposts This week is data and event-heavy in the US. The US Fed FOMC (30 Oct) is likely to result in unchanged policy. US housing data, industrial production (8 Oct), retail sales, consumer confidence (9 Oct), ADP employment report, inflation data (30 Oct), unemployment claims (3 Oct) and ISM manufacturing index ( Nov) are key economic releases for the week Euro zone October Lending Survey (30 Oct) will be a key gauge for shaping expectations towards any potential rate cut or new LTRO. EUR USD continues to climb above key resistance marks Technical Analysis: EUR-USD.40.40.35.354 EUR - USD.30.5.3467.335.35.0 EUR-USD
Key technical indicators and forecasts* USD - JPY TECHNICAL INDICATORS RSI VIEW We remain bearish on USD-JPY in response to crowded net long market positioning which pose the risk of short-term weakness. Stochastics MACD ADX Momentum KEY LEVELS Levels Importance resistance 0.50 Strong resistance 99.0 Spot 97.6 support 96.00 support 94.00 Strong FORECASTS Consensus Q4 03 00 Q 04 0 Q 04 05 Q3 04 07 *Please see Appendix on Pg for explanation on technical indicators Performance USD-JPY ended down (-0.3%) over the previous week as the US dollar remained under pressure after disappointing US employment reports added to expectations of the Fed delaying tapering of its stimulus program. Japan s trade balance improved, largely due to JPY depreciation, but trades volumes still remained soft. More significantly, however, core CPI inflation rose 0.7% y/y in September, its fourth monthly consecutive gain. Technical Analysis Major technical indicators, on balance, are neutral to bearish. We remain bearish on the USD-JPY pair as it continues to correct within a broad contracting triangle range. Record long market positioning has increased the risk of a short term pullback, in our view. We believe the longer term trend is still bullish, a view we expect to hold unless key support is breached or there are signs of decelerating momentum. We would review our outlook if the pair closes above 99.0. Key signposts Japan s industrial production (9 Oct), manufacturing PMI (30 Oct) and housing data (3 Oct) are key economic indicators scheduled for release this week. Probability of pullback grows as record long positions continue to be built Technical Analysis: USD-JPY 03.00 99.00 USD - JPY 95.00 9.00 87.00 99.0 96.00 83.00 79.00 98.4 98.35 97.39 75.00 USD-JPY 3
AUD - USD Key technical indicators and forecasts* TECHNICAL INDICATORS RSI Stochastic MACD ADX Momentum VIEW KEY LEVELS Levels Importance resistance 0.995 Strong resistance 0.975 Strong Spot 0.96 support 0.950 Strong support 0.930 Strong We remain neutral on AUD-USD. We believe the pair is likely to temporarily rise in the very short term before subsequently weakening once the rebound tapers. Performance AUD-USD was down (0.96%) over the previous week after rising short-term Chinese rates sparked fears of mild policy tightening. Australian inflation numbers helped allay fears of another rate cut from the RBA while China s flash manufacturing PMI rose to a seven month high, both of which helped partially support the currency. Technical Analysis Major technical indicators, on balance, are neutral to bullish. We are neutral on the AUD-USD pair and expect it consolidate in the 0.95 0.975 range after the recent rebound pushed it to slightly overbought levels. Short term weakness in the US dollar is likely to support the pair. The longer term trend remains negative, in our view We would review our outlook if the pair falls below 0.950 or closes above 0.975. FORECASTS Consensus Q4 03 0.9 Q 04 0.90 Q 04 0.89 Key signposts Housing data and export prices (3 Oct) along with Chinese PMI ( Nov) will be some of the economic indicator to be released this week. Inflation remains a key driver of RBA policy. Q3 04 0.88 *Please see Appendix on Pg for explanation on technical indicators AUD-USD pair likely to remain within a range for now Technical Analysis: AUD-USD.06 AUD - USD.0 0.96 0.9 0.933 0.96 0.9735 0.975 0.950 0.86 AUD-USD 4
USD - SGD Key technical indicators and forecasts* RSI TECHNICAL INDICATORS Stochastic MACD ADX Momentum VIEW KEY LEVELS Levels Importance resistance.5 Strong resistance.45 Strong Spot.36 support.30 support.8 Strong We are turning bearish on USD-SGD (from neutral earlier) as the pair has broken below both its 00 DMA and medium term support. Performance USD-SGD was down (-0.7%) over the previous week as Emerging market currencies strengthened over rising expectations of a likely delay to the Fed s tapering plans. Technical Analysis Major technical indicators are divergent. However, we turn bearish on USD-SGD (from neutral earlier). The recent correction not only pushed prices below the 00 DMA (.5), but the pair also managed to fall below its medium term trend line. Oversold indicators pose a key risk to our view. We would review our outlook if the pair crossed above.45. Key signposts The performance of the Renminbi is also important for the pair from a trade competitiveness perspective. Singapore bank lending (0 Oct) and business expectations will be the key data released this week. FORECASTS Consensus Q4 03.6 Q 04.6 Q 04.7 Q3 04.6 *Please see Appendix on Pg for explanation on technical indicators USD-SGD likely to continue slipping lower after breaking below the medium term support line Technical Analysis: USD-SGD.30 a USD - SGD.9.8.7.6.5.4.3.. USD-SGD.579.64.56.45.4 5
Key technical indicators and forecasts* ingapore s manufacturing PMI GBP - USD TECHNICAL INDICATORS RSI VIEW We turn neutral on GBP-USD (from bearish earlier) as price action suggests the pair is likely to remain supported for now. Stochastic MACD ADX Momentum KEY LEVELS Levels Importance resistance.645 Strong resistance.630 Strong Spot.68 support.600 Strong support.585 FORECASTS Consensus Q4 03.58 Performance GBP-USD was largely flat (-0.0%) over the previous week after UK economic growth accelerated to its fastest pace in more than three years in Q3, in-line with expectations. Technical Analysis Major technical indicators are divergent. We turn neutral on GBP-USD (from bearish earlier) and expect it to remain supported after failing to breach the medium term support trend line from last week lows. Continued uncertainty around the short-term USD outlook is also likely to be a support. However, sensitivity to disappointing data remains a key risk We would review our outlook if we get a close below.600 or above.630. Key signposts Key data releases during the coming week include consumer confidence (3-Oct) and PMI manufacturing (-Nov). The releases will likely drive a debate over the BoE s conditional long term policy of keeping interest rates low. Q 04.57 Q 04.55 Q3 04.55 *Please see Appendix on Pg for explanation on technical indicators GBP-USD nears recent highs Technical Analysis: GBP-USD.64.630.6 GBP - USD.60.58.56.54.5.50.600.59.563.5483.48 GBP-USD 6
Key technical indicators and forecasts* Inflation XAU - USD TECHNICAL INDICATORS RSI VIEW We remain neutral on gold as the Fed tapering delay-based rebound is likely to be only temporary. Stochastic MACD ADX Momentum KEY LEVELS Levels Importance resistance 40 Strong resistance 360 Spot 35 support 50 support 80 Strong Consensus Q4 03 300 Q 04 50 Q 04 7.5 Performance XAU-USD ended up (.6%) over the previous week as disappointing US economic data fuelled speculation the Fed will maintain its stimulus program into next year. Technical Analysis Major technical indicators are largely bullish. We remain neutral on gold as we see the Fed tapering delay-based rebound as being only a temporary relief rally and would eventually fade once fears of tapering resurface. We are also hesitant to change our longer-term negative view unless it is able to decisively climb above 40. We would review our outlook if move above 360 or drops below 50. Key signpost This short-term view should be viewed within the context of our longer term Underweight view on Gold. Any increase in QE tapering expectations and rising opportunity costs provided by equity market resilience are likely to continue working against gold, in our view. Ongoing central bank purchases, firm retail demand and geopolitical tensions pose risks to our view. Q3 04 30 *Please see Appendix on Pg for explanation on technical indicators Gold is likely to be weighed by longer term bearish trends Technical Analysis: XAU-USD,800,700 XAU-USD,600,500,400,300,00 343 35 47 360 50,00 XAU-USD 7
SUPPLEMENTARY PAIRS* *SUPPLEMENTARY PAIRS - Going forward, we will maintain the EUR, JPY, AUD, SGD, GBP and XAU outlook while adding just key technical levels for the supplementary pairs We remain bearish on USD-CNH as we downside momentum picking up Technical Analysis: USD CNH USD - CNH 6.40 6.35 6.30 6.5 6.0 6.5 6.0 6.05 6.068 USD-CNH We remain neutral on USD-ZAR Technical Analysis: USD ZAR 6. 6.07 6.95 6.53 USD - ZAR 0.60 0.0 9.80 9.40 9.00 8.60 8.0 0.33 9.566 0.00 9.98 9.58 7.80 USD-ZAR We remain neutral on NZD-USD Technical Analysis: NZD-USD 0.87 0.85 0.84 0.83 NZD -USD 0.8 0.79 0.77 0.75 0.874 0.804 0.884 0.8 0.73 Sep- Dec- Mar- Jun- NZD-USD 8
We turn bearish on USD-CHF (from bullish earlier) after key support is broken Technical Analysis: USD CHF 0.99 0.97 USD-CHF 0.95 0.93 0.9 0.96 0.89 0.87 0.884 0.95 0.956 0.934 0.85 Dec- Mar- Jun- USD-CHF We remain bearish on USD-SEK as the pair s trend remains negative Technical Analysis: USD-SEK 7.40 USD - SEK 7.0 7.00 6.80 6.60 6.8 6.4667 6.56 6.5053 6.40 6.4 6.0 Dec- Mar- Jun- USD-SEK We remain bullish on USD-CAD; last week s bullish chart patterns have risen optimism Technical Analysis: USD-CAD.08.06.05 USD - CAD.04.0.00.09 0.98 0.96.0377.0373.074 0.94 Aug- Nov- Feb- May- Aug- Nov- Feb-3 May-3 Aug-3 USD-CAD 9
EUR-USD Interest rate differentials Measures the yield of holding a foreign currency relative to the base currency FX Implied Volatility An approximate indicator used to gauge future expectations of price movements based on FX options market pricing %.5.5 0.5 0-0.5 Feb-08 Feb-09 Feb-0 Feb- Feb- Feb-3 Difference between EUR and USD yr swap EUR-USD (RHS).7.6.5.4.3.. EUR-USD 0 8 6 4 0 8 6 Jan- Jul- Jan- Jul- Jan-3 Jul-3 W Implied Volatility USD-JPY 3.5 %.5 0.5 0 Feb-08 Feb-09 Feb-0 Feb- Feb- Feb-3 Difference between USD and JPY yr swap USD-JPY (RHS) 5 0 05 00 95 90 85 80 75 USD-JPY 9 7 5 3 9 7 5 Jan Jul Jan Jul Jan 3 Jul 3 W Implied Volatility AUD-USD 6 5 4 % 3 0 Feb 08 Feb 09 Feb 0 Feb Feb Feb 3 Difference between AUD and USD yr swap AUD USD (RHS).. 0.9 0.8 0.7 0.6 0.5 AUD USD 7 3 9 5 Jan Jul Jan Jul Jan 3 Jul 3 W Implied Volatility USD-SGD.5 % 0.5 0 0.5 Feb 08 Feb 09 Feb 0 Feb Feb Feb 3 Difference between USD and SGD yr swap USD SGD (RHS).65.55.45.35.5.5 USD SGD 8 6 4 0 8 6 4 Jan Jul Jan Jul Jan 3 Jul 3 W Implied Volatility GBP-USD 3.5 %.5 0.5 0 Feb 08 Feb 09 Feb 0 Feb Feb Feb 3 Difference between GBP and USD yr swap GBP USD (RHS).4.5.6.7.8.9. GBP USD 4 0 8 6 4 Jan Jul Jan Jul Jan 3 Jul 3 W Implied Volatility 0
Central Bank Monetary Policy Meeting Schedules 03* Policy rate** Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Majors US 0.5 30 0 3 8 30 8 UK 0.50 0 7 7 4 9 6 4 5 0 7 5 Euro area 0.50 0 7 7 4 6 4 7 5 Japan 0.0 4 7 4 8 3 5 3 Australia.50 5 5 7 4 6 3 5 3 New Zealand.50 30 4 4 8 3 5 3 Canada.00 3 6 7 9 7 4 3 4 Switzerland 0.5 4 0 9 Asia ex Japan China 6.00 India 7.50 9 South Korea.50 4 4 9 3 8 0 4 Taiwan.875 Singapore Expected Expected Malaysia 3.00 30 7 9 5 7 Indonesia 7.5 0 7 4 3 5 8 Thailand.50 9 0 3 9 0 6 7 Philippines 3.50 4 8 4 5 0 3 5 7 4 * Subject to change ** Data as of 3 September 03
TECHNICAL INDICATORS EXPLANATORY APPENDIX RSI (Relative Strength Index) The RSI indicators can be used to describe the speed at which prices move over a given time period. An RSI above 70 can indicate a currency pair is overbought while an RSI below 30 can indicate the pair is oversold. Stochastic Oscillator The Stochastic Oscillator compares where a security's price closed relative to its trading range over a given time period. The security or index is generally considered oversold when the Oscillator falls to 0%, while a reading of 80% is considered overbought. MACD (The Moving Average Convergence/Divergence) This indicator shows the relationship between two moving averages of prices. A bearish signal is provided when the main moving average line drops below the second moving average line, and vice versa. ADX (Average Directional Index) - This indicator quantifies a trend's strength regardless of whether it is up or down. An index rising above zero provides a bullish signal while an index falling below zero provides a bearish signal. Momentum Indicator - The momentum of a security is the ratio of today's price compared to the price at a given point in the past. If the security's price is higher today, the momentum indicator will be considered strong. If the security's price is lower today, the momentum Indicator will be weak.
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