- Euro set for yearly close below 1.3000
- Looking for additional Euro declines towards 1.2000 in 2012
- US Dollar see as most attractive currency in 2012
- Australian Dollar could be even more exposed then Euro going forward
- Third phase of global crisis expected to hit China
The Euro looks poised to
close out the year below 1.3000 after dropping to a fresh 2011 low by
1.2858 on Thursday. The bearish close is rather appropriate in the grand
scheme of things considering the Eurozone crisis was at the center of
all things troubled in 2011. From here, we would expect to see Euro
declines accelerate into 2012, particularly against the US Dollar, with a
measured move objective coming in somewhere near the 1.2000 area.
Broadly speaking, we anticipate across the board US Dollar bids against
all major and minor currencies, with the US Dollar seen as the most
attractive currency in 2012 on both its safe haven appeal and the
prospects for a sustained economic recovery in the United States.
We also project relative
underperformance even against the Euro in the China correlated commodity
bloc and emerging market currencies, on the expectation that a third
phase of the global recession will soon fully reveal itself in China
into 2012. We think this will be the next big shoe to drop, and we
therefore warn against long positions, specifically in the Australian
Dollar which we contend is highly overvalued and quite exposed at
current levels.
Looking Ahead to 2012 - Foreign Investment in US Equities
While on the surface, the
recommendation appears to be non-currency specific, we view this as an
extremely attractive opportunity for a portfolio hedge in 2012 and
potential arbitrage strategy. Currencies have been broadly outperforming
against the US Dollar in recent years and it finally appears as though
this trend could be on the verge of some form of a reversal back in
favor of the buck. However, long USD positions have also been quite
risky and exposure to the Greenback might bring with it some unwelcome
stress. As such, our recommendation is foreign investment in US equities. What does this mean?
Here is how we see this
playing out. Should current correlations stand, if US equities are to
head higher, then the investor will benefit from the US equity return,
but at the same time, likely have his/her investment offset by the
sell-off in the US Dollar and appreciation in his/her local currency on
the resurgence in risk appetite and outflow from the safe-haven US
Dollar. If on the other hand US equities head lower, then the risk off
market environment will allow the investor to offset his/her loss in US
stocks through the appreciation in the US Dollar on its safe-haven flows
(remember – the investor in invested in US equities and thereby has USD
exposure).
So if this is the case, then
where is the benefit in this trade, and why even do it? Well, what if
we see a break down in familiar correlations where the US equity market
rallies and the US Dollar also rallies at the same time? What if we see a
situation where US equities and the US Dollar become positively
correlated? In this scenario, the investor stands to benefit a great
deal and will not only make money from his investment in US equities,
but will also enhance his/her returns on the appreciation in the US
Dollar.
The global recession appears
to be moving in phases, and with the markets now dealing with phase two
of the crisis in Europe, we can start to anticipate the transition to
phase three, where we believe that China, the commodity bloc economies
and emerging markets will all be exposed. At the same time, we see a
first in and first out type of situation, with the US economy the first
to emerge from the global recession which should translate into a more
upbeat outlook on low valuation US equities and the US Dollar as well,
on a narrowing of yield differentials back in favor of the Greenback as
the Fed begins to signal a reversal of ultra accommodative monetary
policy.
TECHNICAL OUTLOOK
EUR/USD:
The market is now looking to establish below the critical 2011 lows
from January 2011 at 1.2870 and a weekly close below this level will
open the door for the next major downside extension towards the 1.2500
area. Overall, we retain a strong bearish outlook for this market and
look for setbacks to extend towards the 1.2000 handle over the coming
months. While we would not rule out the potential for corrective
rallies, any rallies should be very well capped above 1.3500.
USD/JPY:The
market has managed to successfully hold above the bottom of the daily
Ichimoku cloud to further strengthen our constructive outlook and we
look for the formation of a inter-day higher low by 76.55 ahead of the
next major upside extension back towards and eventually through the
recent multi-day highs by 79.55. Ultimately, only a close back below the
bottom of the Ichimoku cloud would negate outlook and give reason for
pause, while a daily close back above 78.30 accelerates.
GBP/USD:
Rallies have been very well capped ahead of 1.5800 and it looks as
though a lower top has now been carved out by 1.5780 ahead of the next
major downside extension back towards the October lows at 1.5270. Key
support comes in by 1.5400 and a daily close below this level will be
required to confirm bias and accelerate declines. Ultimately, only back
above 1.5780 would negate bearish outlook and give reason for pause.
USD/CHF:
The recent break above the critical October highs at 0.9315 is
significant and now opens the door for the next major upside extension
over the coming weeks back towards parity. A confirmed higher low is now
in place by 0.9065 following the recent break over 0.9330, and next key
resistance comes in by 0.9785. Ultimately, only back under 0.9065 would
delay constructive outlook.
Written by Zeshan Muhammad Ali Awan
Technical Currency Strategist
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