FOREX WEEKLY FORECAST 17TH - 22ND MAY, 2009

FOR THE WEEK OF 17TH MAY - 22ND MAY, 2009
Fundamental Outlook for Japanese Yen: Neutral

Fundamental Outlook For New Zealand Dollar: Neutral

Fundamental Outlook for British Pound: Bearish

Fundamental Outlook for Australian Dollar: Neutral

Fundamental Outlook for Swiss Franc: Bearish

Fundamental Outlook for Euro This Week: Bearish

Fundamental Forecast for Canadian Dollar: Bearish

Fundamental Outlook for US Dollar: Bullish

This Week's Market Outlook
Risk rally stalls and reverses
Risk asset markets have posted strong signals that a significant reversal is underway and we would expect to see further declines in stocks, commodities and the JPY-crosses and a return to USD strength (except against JPY) in the weeks ahead. In currencies, bearish engulfing lines dominate weekly candlestick charts for the JPY-crosses, and daily closes below the Kijun lines augur weakness as well. USD/JPY has tested below the base of its daily Ichimoku cloud at 95.02 and a close below may signal weakness toward the 90.00/92.50 area. An unfolding head-and-shoulders pattern in USD/JPY (Daily Chart) suggests potential back to the 87.50/89.00 area. JPY-crosses are also likely to test their clouds next week, and a looming downside crossover of the Tenkan and Kijun lines would generate yet another sell signal. The commodity currencies (AUD & CAD), which led the way higher during the risk rally, appear to be leading the way lower in the retreat. In particular, we will be watching the 0.7334 and the 1.1992 Kijun lines in those pairs vs. USD, where a daily close through those levels would argue for a more aggressive decline for the commodity currencies. In EUR/USD, the 1.3400/50 area, highlighted by the 200-day moving average at 1.3420 remains critical support, below which we would expect losses to accelerate. In GBP, the 1.5000/50 area represents a similarly important pivot level, and a decline below would suggest greater downside potential in Cable.
Having just called an end to the recent rally in risk sentiment, we are mindful that topping patterns frequently have several false starts. In the current environment, we can't point to any one, single news or event catalyst behind the apparent reversal unfolding. We are also aware that prices in USD/JPY, EUR/USD, and GBP/USD are still above key support levels highlighted above. As such, we would be reluctant to chase this move lower in JPY-crosses/higher in the USD from current levels. Instead, we would look for opportunities to sell JPY-crosses on corrective bounces/buy USD (except against JPY) on pullbacks in anticipation that the risk reversal will continue. The relatively light data calendar next week may offer some additional signs of improvement (see below), potentially offering just such rebounds and allowing for entry at more advantageous price levels. Should further data improvements materialize and risky assets fail to rally materially, we would view that as confirmation that risk-appetites have further room to unwind. The coming weeks will likely settle the argument of whether we have been in a genuine risk recovery or simply in a bear market rally, and we think it is the latter.

PAIRS TO BUY FOR THE WEEK OF 17TH – 22ND MAY, 2009
USDCAD
USDCHF


PAIRS TO SELL FOR THE WEEK OF 17TH – 22ND MAY, 2009
EURUSD
AUDUSD
NZDUSD
GBPUSD
CHFJPY
GBPJPY
CADJPY
EURJPY
AUDJPY
NZDJPY
USDJPY