FX STRATEGY July 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 June to 8 June 03 EUR-USD USD-JPY AUD-USD USD-SGD GBP-USD XAU-USD -4.77 -.34-0.85-0.88-0.65.7-6 -4-0 % Suren Chelliah Steve Brice Rob Aspin, CFA Manpreet Gill Audrey Goh Victor Teo, CFA Investment Strategist Chief Investment Strategist Head, Equity Investment Strategy Head, FICC Investment Strategy Investment Strategist Investment Strategist Major central banks could surprise We see a growing likelihood of monetary policy by the BoE, ECB and RBA surprising the market this week. US labour market data on July 5 is key for the short term USD view EUR-USD We remain bearish on the EUR-USD as technical indicators increasingly point to a negative outlook. USD-JPY We remain bullish on USD-JPY as technical indicators and price patterns are beginning to turn bullish following the recent correction. AUD-USD We remain neutral on AUD-USD as market positioning continues to suggest a temporary bounce is likely before subsequent weakness. USD-SGD We remain bullish on USD-SGD as technical indicators continue to point to an upside bias for the pair. GBP-USD We remain bearish on GBP-USD as broader downward momentum is expected to resume. XAU-USD We turn neutral on gold (from bearish earlier) due to the likelihood of a temporary rebound given oversold conditions. However, the broader downtrend remains in place. CORE PAIRS Short term Spot (-4 weeks) Support Support Resistance Resistance EUR-USD.60.85.30.330.356 USD-JPY 9.00 95.50 99.3 0.0 05.0 AUD-USD 0.854 0.896 0.98 0.988.06 USD-SGD.00.30.67.96.36 GBP-USD.465.503.5.545.575 XAU-USD 50 00 43 350 400 SUPPLEMENTARY PAIRS* Short term Spot (-4 weeks) Support Support Resistance Resistance USD-CNH 6.085 6.0 6.3 6.50 6.75 USD-ZAR 9.70 9.676 9.87 0.30 0.7 NZD-USD 0.735 0.758 0.777 0.805 0.830 USD-CHF 0.90 0.90 0.945 0.950 0.970 USD-SEK 6.3 6.500 6.69 6.80 6.940 USD-CAD 0.99.0.05.060.089 *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 RSI VIEW We remain bearish on the EUR-USD as technical indicators increasingly point to a negative outlook. Stochastic MACD ADX Momentum KEY LEVELS Levels Importance.356 Strong.330 Spot.30.85.60 Strong FORECASTS SCB Consensus Q3 03.3 0.8 Q4 03.9.7 Performance EUR-USD declined (-0.85%) due to growing expectations of further policy easing by the European Central Bank (ECB) following dovish comments by Mario Draghi. Technical analysis Major technical indicators are divergent. We remain bearish on the EUR-USD. As long as the pair continues to trade below.3, technical indicators are increasingly pointing to a negative outlook. We would review our outlook if the pair rebounds above.330. Key signposts Euro area s unemployment rate (July ), PMI Services and Composite data (July 3) and the European Central Bank s (ECB) policy decision on July 4 are key. Although many Euro area countries have been given greater flexibility on austerity measures, we believe the pace of the economic growth recovery is unlikely to improve significantly in the short term. However, the contracting balance sheet of the ECB and positive current account balance of the Euro area continues to provide some for the EUR. Q 04.30.6 Q 04.7.6 *Please see Appendix on Pg 0 for explanation on technical indicators EUR-USD likely to correct lower Technical Analysis: EUR-USD.38.36.34.330.3.30.85.8.6.4..308.3086.3073.0 May- Aug- Nov- Feb-3 May-3 EUR-USD EUR - USD
USD - JPY Key technical indicators and forecasts* TECHNICAL INDICATORS RSI Stochastics MACD VIEW We remain bullish on USD-JPY as as technical indicators and price patterns begin to turn bullish following the recent correction. Performance USD-JPY rose (+.7%) last week mainly due to a stronger USD. ADX Momentum KEY LEVELS Levels Importance 05.0 Strong 0.0 Strong Spot 99.3 95.50 Strong 9.00 Strong FORECASTS SCB Consensus Technical Analysis Major technical indicators, on balance, are bullish. We remain bullish on USD/JPY as technical indicators and price patterns have begun to turn bullish following the recent correction. However, we believe the pair is likely to face strong at 0 due to the lack of momentum. We would review our outlook if we get a weekly close below 95.50. Key signposts The effectiveness of aggressive BoJ monetary easing remains critical for the JPY. The next Bank of Japan (BoJ) monetary policy meeting is scheduled on July. A win by Prime Minister Abe at the Upper House election on July would likely be bullish for the pair given market expectations of additional measures to the economy. Q3 03 96 03 Q4 03 97 05 Q 04 0 06 Q 04 0 07 *Please see Appendix on Pg 0 for explanation on technical indicators USD-JPY up on USD strength Technical Analysis: USD-JPY 03.00 USD - JPY 99.00 95.00 9.00 87.00 83.00 79.00 99. 96.97 89.98 0.0 95.50 75.00 May- Aug- Nov- Feb-3 May-3 USD-JPY 3
AUD - USD Key technical indicators and forecasts* TECHNICAL INDICATORS VIEW We remain neutral on AUD-USD as market positioning continues to suggest a temporary bounce is likely before subsequent weakness. RSI Stochastic MACD ADX Performance AUD-USD declined (-0.88%) over the last week due to a stronger USD and lower demand for higher-yielding currencies. Momentum KEY LEVELS Levels Importance.06 Strong 0.988 Strong Spot 0.98 0.896 0.854 Strong FORECASTS SCB Consensus Q3 03 0.9 0.94 Q4 03 0.88 0.94 Q 04 0.85 0.95 Q 04 0.83 0.90 *Please see Appendix on Pg 0 for explanation on technical indicators Technical Analysis Major technical indicators are divergent. We remain neutral on AUD-USD. Though technical indicators and price patterns point to further downside (after the pair broke below strong at 0.93), we choose to stay neutral given the continued likelihood of a temporary rebound on short market positioning. We acknowledge that net short market positioning has lingered for longer than we expected. However, we continue to believe a rebound is likely as extreme short positioning rarely normalises without one. We would review our outlook if the pair ends the week below 0.896 or above 0.988. Key signposts We believe growing weakness in the domestic economy has raised the likelihood of an interest rate cut on July. A 5bps point cut by the RBA will bring its policy rate to the same level as that of the Reserve Bank of New Zealand at.5% which could lead to further weakness in the pair. However, markets continue to expect no change by the Reserve Bank of Australia (RBA) at its next policy meeting on July ahead of the release of inflation data on July 4. Positive economic data from China would likely be bullish for the AUD and vice versa. AUD-USD market positioning likely to trigger a temporary bounce Technical Analysis: AUD-USD.06 AUD - USD.04.0.00 0.98 0.96 0.94 0.9 0.90 0.9853.003.059 0.88 May- Aug- Nov- Feb-3 May-3 AUD-USD 0.988 0.896 4
USD - SGD Key technical indicators and forecasts* TECHNICAL INDICATORS VIEW We remain bullish on USD-SGD as technical indicators continue to highlight an upside bias. RSI Stochastic MACD ADX Momentum Performance USD-SGD declined (-0.65%) over the last week as risk appetite in the Asia ex-japan region improved. Singapore industrial production in May grew by more than market expectations while y/y inflation in May rose marginally. KEY LEVELS Levels Importance.36 Strong.96 Strong Spot.67.30 Strong.00 Strong FORECASTS SCB Consensus Q3 03.6.5 Q4 03.5.5 Q 04.4.5 Technical Analysis Most technical indicators are bullish. We remain bullish on the pair as technical indicators continue to point to an upside bias. We would review our outlook if the pair ends the week below.30. Key signposts We believe the SGD trade-weighted basket will likely trade closer to the centre of the policy band so as to provide a more accommodative growth environment while maintaining pressure on inflation expectations. Singapore s Electronic Sector Index and Purchasing Managers Index (July 3) are key. Positive economic data from China would likely be bullish for the SGD and vice versa. The performance of the Renminbi is also important for the pair from a trade competitiveness perspective. Q 04.6.3 *Please see Appendix on Pg 0 for explanation on technical indicators USD-SGD likely to rise Technical Analysis: USD-SGD USD - SGD.30.9.8.7.6.5.4.3..494.456.35. May- Aug- Nov- Feb-3 May-3 USD-SGD.96.30 5
Key technical indicators and forecasts* ingapore s manufacturing PMI GBP - USD TECHNICAL INDICATORS RSI Stochastic MACD ADX Momentum VIEW We remain bearish on GBP-USD as the broader downward momentum is expected to resume. Performance GBP-USD declined (-.34%) last week on growing expectations of further monetary easing by the Bank of England (BoE) after Governor Mervyn King said the UK economy was too weak to be satisfactory. KEY LEVELS Levels Importance.575 Strong.545 Strong Spot.5 Technical Analysis Major technical indicators are, on balance, neutral to bearish. We remain bearish on GBP-USD as broader downward momentum is expected to continue. However, a failure to break below.503 could lead to a small rebound in the pair. We would review our outlook if we get a weekly close above.545..503.465 Strong Key signposts The Bank of England (BoE) monetary policy committee meeting on July 4 is key as it will likely lay out the BoE s monetary policy strategy under Governor Mark Carney. FORECASTS SCB Consensus Q3 03.5.5 Q4 03.46.50 Q 04.48.50 Q 04.47.50 *Please see Appendix on Pg 0 for explanation on technical indicators Further downside is likely Technical Analysis: GBP-USD GBP - USD.64.6.60.58.56.54.5.50.48 May- Aug- GBP-USD Nov- 50 dma 00 dma Feb-3 00 dma May-3.545.503.5383.537.568 6
Key technical indicators and forecasts* Inflation XAU - USD TECHNICAL INDICATORS RSI Stochastic VIEW We turn neutral on gold (from bearish earlier) due to likelihood of a temporary rebound given oversold conditions. However, the broader downtrend remains. MACD ADX Momentum KEY LEVELS Levels Importance 400 Strong 350 Spot 43 00 50 Consensus Q3 03 500 Q4 03 500 Q 04 500 Performance XAU-USD declined (-4.77%) over the last week due to falling investment demand. Inflation expectations, as proxied by US breakeven inflation rates, have declined sharply, reducing demand for gold as an inflation hedge. Technical Analysis Major technical indicators are divergent. We turn neutral on gold (from bearish earlier) due to the likelihood of a temporary rebound given oversold conditions. However, from a longer term perspective, the larger downward trend remains in place. We would review our outlook if the pair moves back above 350 or below 00. Key signpost This short-term view should be viewed within the context of our longer term Underweight view on Gold. Rising expectations of an end to the Fed s QE program, receding tail risks, likely USD strength and rising opportunity costs continue to work against gold, in our view. Ongoing central bank purchases pose some risks to our view. Q 04 - *Please see Appendix on Pg 0 for explanation on technical indicators Gold s downtrend intact Technical Analysis: XAU-USD,800,700,600 XAU-USD,500,400 404 498 604 350,300,00 00,00 May- Aug- XAU-USD Nov- 50 dma 00 dma Feb-3 00 dma May-3 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 turn neutral on USD-CNH. A slow and gradual downtrend is likely Technical Analysis: USD CNH 6.40 6.35 6.30 6.469 6.79 6.084 USD - CNH 6.5 6.0 6.5 6.5 6. 6.0 May- Aug- Nov- Feb-3 May-3 USD-CNH We turn neutral on USD-ZAR from being bearish earlier. Economic and political uncertainty continued to effect the ZAR Technical Analysis: USD ZAR 0.50 0.0 0.30 USD - ZAR We are neutral on NZD-USD Technical Analysis: NZD-USD NZD -USD 9.70 9.30 8.90 8.50 8.0 7.70 0.89 0.87 0.85 0.83 0.8 0.79 0.77 0.75 0.73 9.68 7.30 May- Aug- USD-ZAR Nov- 50 dma 00 dma Feb-3 00 dma May-3 0.893 0.878 0.874 0.7 May- Aug- Nov- Feb- May- Aug- Nov- Feb-3 May-3 0.805 0.758 NZD-USD 9.53 9.9 8.98 8
We are bullish on USD-CHF. We see strong at 0.95 Technical Analysis: USD CHF 0.99 0.97 0.95 0.95 USD-CHF 0.93 0.9 0.89 0.87 0.85 Aug- Nov- Feb- May- Aug- Nov- Feb-3 May-3 USD-CHF 0.9439 0.9399 0.9345 0.9 We are bullish on USD-SEK. Gentle upward trend holds Technical Analysis: USD-SEK 7.40 USD-CHF 7.0 7.00 6.80 6.60 6.40 6.575 6.496 6.5457 6.50 6.8 6.0 Aug- Nov- Feb- May- Aug- Nov- Feb-3 May-3 USD-SEK We are bullish on USD-CAD Technical Analysis: USD-CAD.08 USD - CAD.06.04.0.00 0.98 0.96.06.0.09.00.0053 0.94 Apr- Jul- Oct- Jan- Apr- Jul- Oct- Jan-3 Apr-3 USD-CAD 9
EUR-USD %.5.5 0.5 0 Interest rate differentials Measures the yield of holding a foreign currency relative to the base currency -0.5 Nov-07 Nov-08 Nov-09 Nov-0 Nov- Nov- Difference between EUR and USD yr swap EUR-USD (RHS).7.6.5.4.3.. EUR-USD 0 8 6 4 0 8 FX Implied Volatility An approximate indicator used to gauge future expectations of price movements based on FX options market pricing 6 Jan- Jul- Jan- Jul- Jan-3 W Implied Volatility USD-JPY 4 3.5 3.5 %.5 0.5 0 Nov-07 Nov-08 Nov-09 Nov-0 Nov- Nov- Difference between USD and JPY yr swap USD-JPY (RHS) 5 5 05 95 85 75 USD-JPY 9 7 5 3 9 7 5 Jan- Jul- Jan- Jul- Jan-3 W Implied Volatility AUD-USD 6 5 4 % 3 0 Nov-07 Nov-08 Nov-09 Nov-0 Nov- Nov- 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 W Implied Volatility USD-SGD.5 % 0.5 0-0.5 Nov-07 Nov-08 Nov-09 Nov-0 Nov- Nov- 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 W Implied Volatility GBP-USD 3.5 %.5 0.5 0 Oct-07 Oct-08 Oct-09 Oct-0 Oct- Oct- 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 W Implied Volatility 0
Central Bank Monetary Policy Meeting Schedules 03* FX Strategy Policy rate** Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Majors US 0.5 30 0 3 30 8 UK 0.50 0 7 7 4 9 6 4 0 7 5 Euro area 0.50 0 7 7 4 6 4 7 5 Japan 0.0 4 7 4 8 5 4 0 Australia.75 5 5 7 4 6 3 5 3 New Zealand.50 30 4 4 8 3 5 Canada.00 3 6 7 9 7 4 3 4 Switzerland 0.00 4 0 9 Asia ex-japan China 6.00 India 7.5 South Korea.50 4 4 9 3 8 0 4 Taiwan.875 Singapore - Expected Expected Malaysia 3.00 30 7 9 5 7 Indonesia 6.00 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 0 June 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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