Weekly FX Insight

• May 31, 2005
• Dave Floyd

 

 

Weekly FX Insight — May 31, 2005

 

 

–         
Our long term view for the GBP

–         
EUR bounce?

–         
USD/JPY, 115?

 

 

*  The British
pound, GBP/USD, is likely to fall much further in the months to come as a
rapidly decelerating economy and slumping property prices will likely cause a
significant drop in consumer confidence.  Basic correlation analysis shows a
strong relationship between the RICS housing market survey results and future
home prices shows as well as consumer confidence.  In addition, a rapid rise in
the number of insolvencies/bankruptcies and property repossessions is rather
alarming and likely to add more uncertainty to the picture.

 

We will continue to trade GBP/USD in the direction of the
prevailing short-term trends, currently down, but would suggest a using EUR/GBP
cross as a way to play our longer-term viewpoint given the relative “orderly”
price action given that the trade might last several weeks/months.

 

The sudden drop on the heels of the French rejection on the
EU constitution might well provide a nice entry point for longs on what we would
consider a bit of an over-reaction.  In addition, there is some solid support in
the .6930 area (200-day ema).

 

*  In a similar
vain as the above paragraph, we see the sell-off in EUR/USD on Sunday evening a
potential opportunity for short to medium-term traders.  With 1.2540
representing decent technical support (pivot level) as well as the top end of a
long-term trading range that was broken back on October 15, 2004, longs here
represent decent risk/reward with possible upside to as much as 1.2600 and/or
1.2750.

 

*  Japan
continues to deteriorate, economically, at a rapid pace, and the recent drop off
in exports to China will not help out Japan’s current account surplus.  This
combined with ongoing rate differentials favoring the US over Japan, the slide
in the yen versus the dollar seems likely.  Technically, the long-term bearish
trend for USD/JPY going all the way back to 2002 has been broken signaling to us
a potential move towards 115. 

 

We are long USD/JPY from 108 as of last Friday and view
this as a long-term position.  As a result, there will likely be short-term
set-backs along the way especially as speculators have built up rather large
“short yen” positions in the last few months.  Regardless, our viewpoint is that
the USD/JPY will trade higher over the next several weeks to months.

 

As always, feel free to send me your comments and
questions.

 

Dave