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Morning Briefing

Medium Term Forecasts on Euro and Yen

Medium Term Forecasts on Euro and Yen

11-Apr-2014

EURO-DOLLAR @ 1.3884:
GREAT SQUEEZE NEARING AN END


The current state of Euro can be best stated as a Great Squeeze only. As evident from the chart above, the price has been stuck in a contracting range since the February 2013 top at 1.3711. The last three tops differ by about 60 pips only. The fast approach to the apex of the converging black lines indicates that the end of this contraction may not be far away.

It is very hard to take a firm directional stance within a range, harder when the range is contracting. Rather, it is always better to follow the direction of the inevitable breakout. We discuss both the bullish and bearish possibilities here.

The bullish possibility: Euro would hold above 1.3670 or at most 1.3580 in any correction and a very swift rally would materialize shortly. This would be confirmed on a close above 1.40

The bearish possibility: 1.3967 may already have been the top and the major trend may already have reversed to the downside. Even if another high comes before any severe fall, it may not be above 1.40. The confirmation for this bearish scenario would come on a close below 1.3580.

Conclusion: Though the severe loss of momentum and the failure to break above the upper boundary of the range may make us biased towards a bearish view, the series of higher highs/lows and the frequent hitting at the resistance line hinting at inherent bullish strength can't be ignored either. So both bulls and bears can claim reasons favoring them that make wait for a breakout the most prudent way.


EURO-RUPEE @ 85.57:
DOWNWARD MOMENTUM IN DOUBT


The chart of EUR-USD is ambiguous and that is reflected in the Euro-Rupee chart in a way too. The first phase of the fall that started from the 91.93 high of Aug-13 had terminated at 82.6650 in Oct-13 and a sideways consolidation had begun. This sideways consolidation and time correction between 82.50-86.00 looked to have finished on the break below 84.00 out of the black channel three weeks ago.

But the lack of follow-through selling last week raises some questions about the actual strength of the bears. Currently the price is testing the supply zone at 84.00-84.50 and the price action there may determine the next direction. If the bears have to win this battle, they must attack right now from this very zone.

In case the downtrend remains on course, the black channel gives us our first target at 80. From a broader perspective, the entire fall from 92 is contained in a downward channel (Red) and only a break of the upper boundary of this red channel can turn the bearish tide over. The probability of a break of the downtrend can't be ruled out altogether given that the big fall that could have been expected after the range breakdown might itself be under doubt.

In case Euro manages to break above 1.40, the buyers of Euro-Rupee may attempt to break above the red channel and push the price up to 86-87 once again. Till that happens, we go with the existing downtrend with a very tight stop-loss above 84.25.


DOLLAR-YEN @ 101.60:
DOWNWARD MOMENTUM IN DOUBT


The upmove in Dollar-yen has been going on for more than two years now and for the first time the bullish momentum is in question as the black channel has been broken this month. Wave theory suggested a possible top at 105.44 back in January would be confirmed below 100.75-50.

The point is, the inability of the black channel to support the price brings the bears back into contention and they may try to do exactly that and push the advantage home below 100.75-50.

Now there is a 70% probability of Dollar Yen failing to break above 104-104.50 and breaking below the black channel instead, which could result in a broad sideways range between 96 and105. A break below 101.50 and then 101.00 could be the initial signal for weakness.

For the moment, the best bet for the bulls would be to defend 101.50 to keep USDJPY in a sideways mode but that might be a temporary reprieve at best.

Traders may initiate shorts below 100.50 with a very tight stop-loss above 101.50.


YEN-RUPEE @ 59.20:
DOWNTREND BREAKING?


In the last few sessions, Yen had weakened against Rupee just like Euro and Dollar and had finally broken below the 8-month long support area of 58.50-75. But it seems this could be a false break and if so a lot of bears who may have initiated shorts on the break of the support may be trapped.

Admittedly 60.00-60.50 may still resist any rise but the return inside the range so soon after the big break and the lack of follow through selling implies inherent strength. The weekly candles show a pattern called Morning Star, indicating further possible rally if Yen-Rupee can stay above this week's high. In that case, it may rise towards 62.00-62.25 the upper boundary of the big range marked between the horizontal black lines in the chart above.

 
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