Like all other market participants we expect today’s meeting of the FOMC to be a non-event with no change in US interest rates. If this is confirmed, then it will be back to technical considerations to provide direction in view of the fact that there are no significant news due during the week. Last Friday’s close above 1.2660 was very encouraging for the euro, pointing to a minimum advance to 1.2770, where we shall book profit on our longs established at 1.2660. We view the 1.2770 as toppish expecting that the recent range of 1.2600-1.2800 to hold. In the event of a clear break above 1.2805, the outlook will change in favour of the euro, indicating a breakout on the upside for minimum target of 1.2860, then the major resistance line of 1.2925, which is a combination of the tops seen in May and Aug ’06, as well as the all-time high on the NY closing charts. Fresh long euros established on break of 1.2805/60 should be cut on rally to 1.2925 and new shorts attempted by aggressive traders with stops above break of 1.2980, the previous high holding since May ’06. On the downside, if 1.2770 manages to cap the upside and subsequently the euro breaks through 1.2660, then expect a move to 1.2615. The real support however where we expect a major fight between the bulls and bears to occur is the 1.2560 level. Go long on the dip to 1.2560, but if it breaks, then protect stop-sell as anything below 1.2560 and 1.2510 is likely to open the way for a major down-move to 1.2455, and perhaps to 1.2395-1.2330.
USD/CHF: Our strategy to short the Swiss franc against the euro and sterling worked perfectly last week and having exited out of the crosses, we are looking to re-establish new shorts, on the expectation that more CHF weakness is on the way once the current minor correction ends. Against the dollar, we may witness a decline to 1.2420 to 1.2390, but there we suggest long dollars with stops either below 1.2360 or maximum 1.2310 to protect against a move to 1.2220. If the 1.2420 is seen and holds, then brace for a strong rally beyond 1.2625 targeting 1.2760, which is our new medium-term target on USD/CHF. As for the EUR/CHF and GBP/CHF crosses, look to pick up the dips for new assault on 1.60 and 2.38 respectively.
USD/JPY: Here as well our strategy to short the yen ahead of the G7 proved correct, and we did not lose much by going square into the G7 meeting over the weekend. With the 117.40 holding the downside, we expect a break above 118.15 to target 118.40 to 118.90, but advise caution at levels near 119.20/40 since Japanese importers are likely to use such rallies to hedge against receivables. Otherwise, a break below 117.40 is likely to yield 116.80 with heavy support between 116.30-80 seen holding the range.
GBP/USD: We played sterling longs on the crosses and came out well last week and look to repeat the exercise against the CHF when the correction ends somewhere around 2.35. Against the dollar, cable has started well bid from 1.8730 low, which is very bullish since it is the hidden support line extending from the lows. If the 1.8730 holds and subsequently the 1.8860 resistance is given, then brace for a minimum move to 1.8920, which once broken, will confirm a rally to our medium-term objective of 1.9040. We suggest longs on breakouts above 1.8860/1.8920, but profit taking at 1.9040, and even some shorts with stops above 1.9090 to protect against a move to 1.9140, then 1.9220. On the downside, if at anytime the 1.8730 to 1.8650 support gives way, then brace for a quick move to 1.8580, while not excluding the possibility of a decline to 1.8380.
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