Currency Outlook- 2nd November 2009

Euro



The European major has nicely corrected towards the rising medium term trendline – just below 1.47. In all likelihood, the euro will witness a bounce this week from the current levels back towards 1.4950-1.5020, which puts the very short term preferred strategy towards euro buys with tights stops below 1.4625.

That said, the impending rally may not extend too much beyond 1.5050 from a macro picture - even if it does extend it would only offer opportunities for shorting the pair or exiting out of current longs as a test of 1.4430 seems reasonable after the current rally.

STERLING

Since the last report, pound has marked gains although missing our target of 1.6740 by a cent. There is no reason to alter our bullish view yet, as it continues to stay bid above 1.61-1.62.


From an Elliot perspective, the 4th wave has probably concluded putting the odds for a shoot towards 1.74-1.75 to complete the 5 wave sequence in the coming weeks. Break above 1.6740 will confirm this bullish count.

Preferred Strategy: Longs with stops below 1.6150


Dollar/ Rupee




The dollar as expected retraced into the mid 47 before turning again. As noted in the last report, so long as price action remains capped below the falling trendline resistance, now at 48, bias would be in favour of the Indian unit with rallies offering opportunities to short the dollar for a move again towards 45.50 - 46.


Dollar Index


In the current week, we could see the dollar index dip again towards 74.15 from the current 76.20.



However, from an Elliot (macro) perspective, the dollar index appears to be in the last wave , namely the C wave in the broader A-B –C corrective sequence. If this wave count is true, the corrective C wave should ideally terminate around 73-74 and head for a multi week rally.

A convincing breach above the pink line - (50 day EMA) would be needed to confirm this reversal.

Pound



As the dust settles after a roller coaster surprise in the markets particularly the Indian currency market, it’s time again to reassess our views on the various currencies.

I begin with the Queen’s currency, for the simple reason that chart developments are commanding a greater sense of clarity for this pair than any other.

As can be seen from the chart above, there is a reversal bar confirmation in the dailies. Also the RSI (green line at the bottom) has broken a downtrend. This breakout in the RSI presages a similar breakout in the price (GBP) above the falling trendline –In which case we could see a move towards 1.6740 shortly.

From an Elliot wave perspective, the fall from 1.70 to 1.57 appears to have unfolded in a 3 wave fashion .And since a 3 waver is typical of a corrective price action, we could see the pound 5 wave rally in the medium term- possibly even beyond 1.70



EURO



Taking the (dollar) bull by its horns, the euro trounced it to multi month lows. While the larger trend is yet to show clear signs of a reversal, the rally could take a temporary breather .The divergence on the MACD (dailies) is suggestive of a waning of upside momentum for the euro.

Holding below 1.4980 could trigger an unwinding of euro longs, putting the target at 1.46-1.4630.

RUPEE



The rupee hogged much of the limelight gaining 5% in just about a fortnight. Breach below 46.70 is a critical development as this support was key in withstanding selling pressures for nearly 4 consecutive attacks, right from late November last year.

A significant breakthrough for the rupee such as this clearly tilts the strategy towards “sell upon rises” as against the erstwhile “buy upon dips” for the medium term. Possible targets of retracement would be 46.70, 47.30 and 47.50-47.80. So long as rallies are capped below the falling trendline (now at 48.11) , the bias would be in favour of the Indian unit.

Only and only upon a weekly close above 48.11-48.30 would sufficiently take the dollar out of the woods.


NOTE


There is considerable amount of negative sentiment towards the dollar – talks of it being replaced, dollar demise etc etc. In the past 5 years this has typically preceded major turns for the dollar .With the exception of pound and rupee which are still to catch up on the dollar index’s fall , the European currency may be closer to its fag end of the rally – given that the dollar index is oversold on multiple times –daily, weekly and monthly.

It is possible we have a scenario wherein dollar index gains, euro falls and rupee gains in the near to medium term

The reasoning or logic that tricked me into believing that the rupee’s near term direction was towards 49-50 was very simply this: if the dollar was holding above 48 despite the cross currency/commodity/ equity rally, then logically it should strengthen further when the asset classes correct. However, little did I know that the rupee was merely playing laggard and would simply follow the rest but with a time gap. If this is a lesson that the market is teaching –and a painful one at that, I am led to believe that while the near-medium term would be favorable for the rupee, it may not last indefinitely – for possibly after a 6 month gap after the dollar index reverses, the rupee may begin to turn back into weakness.