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February 27, 2008

FX Charts Strategy EURNZD, AUDCAD, EURCAD, CADJPY, USDJPY
by Ashraf Laidi

The surging euro hasn't only been a case of broad dollar weakness but also of improving confidence in the Eurozone's biggest economy as the currency posted broad gains even versus the soaring Aussie, Kiwi and loonie.

Our FX Charts strategy yesterday was bullish EURGBP, EURCAD and bearish USDJPY. EURGBP pushed up from 0.7545 to 0.7616, surpassing our 0.7575 objective. EURCAD bounced off its 1.4684 low to 1.4849, exceeding our 1.4780 objective. USDJPY dropped from 107.77 to 106, reaching towards 105.98 and overshooting our 106.80 target.

EURNZD Eyes Further Gains
Euro's 2-day bounce seen boosted against NZD based on: 1) the decline in New Zealand's Business Confidence index, which tumbled to 9-month lows in February to -43.9 from -4.9; 2) potential nervousness causing general drag on high yielding AUD and NZD against lower yielding currencies 3) contrasting momentum play between EUR and NZD. We expect the pair to lift off its 1.8500 territory towards 1.8550 and 1.8595. Medium target stands at 50-day MA of 1.8660, which is viable in event of negative turnaround in equities.

No analysis on NZD can be carried out without a glance on the S&P500 as the index approaches key technical levels at 1,385-90, which are the 50-day MA, 3-month trend line resistance and 50% retracement of the decline from the November 12 high to the January 23 low. Stochastics indicate a possible excess in momentum at the said level. Strength of the rally shall be tested against whether the index closes above 1,395. Failure to do should keep NZD under pressure and boost the EURNZD pair.

AUDCAD Bounce Ahead of BoC, RBA
The Aussie's improved luster is likely to extend as long as global risk appetite maintains equities higher, in which case will renew expectations for one more rate hike from the Reserve Bank of Australia. Recall the RBNA has raised rates to 7.25% last month, the highest in 12 years. In contrast, Tuesday's Bank of Canada interest rate announcement is widely expected to cut rates by 25-bps to 3.75%. We expect the decision to weigh on the loonie regardless of the magnitude of the rate cut as BoC is may issue a dovish statement stressing the decline in inflation and warning against the downside growth risks from the US. Thus, the BoC will want to open the door for further rate cuts in the event of a 25-bp rate cut in order to stabilize the soaring loonie.

A possible retreat will likely find support at 0.9135 before redressing towards 0.9220 and 0.9300.

EURCAD Set for Further Gains
We add to our Tuesday call favoring EURCAD as CAD bullisness is seen on the wane ahead of Tueasday's BoC rate decision. We expect the bounce to reach towards the 50-day MA of 1.4815, followed by 1.4855. Downside risk to this strategy emerges from potential jawboning by the ECB regarding the euros' currency strength. Drastic calls from political figures such as French Pres Sarkozy may also temper the current boost to the currency, but we expect ECB hawkishness to prevail especially at a time when soaring oil prices are fuelling the already rising inflationary pressures. Possible target stands at 1.49 next week, with key foundation stands at 1.4640.

CADJPY Downside Ahead Despite Oil
What appears to be a low probability strategy in favoring JPY vs CAD may make more sense moving into next week's BoC interest rate decision, which is likely to weigh on the loonie regardless of the magnitude of the rate cut. Considering the renewed rise in CAD, we expect the BoC to issue a dovish statement stressing the decline in inflation as well and warning against the downside growth risks from the US. We expect CADJPY to break past the 108.50 support and onto 107.70. Any event risk dragging on equities is seen propping JPY across the board and CAD will be an attractive negative candidate. Key foundation stands at 107.

USDJPY
We maintain our medium term bearishness in USDJPY despite the pair's sharp breach of the 4-week trend line support of 106.80, which we now expect to act as interim resistance on the current 106.40s.

Ashraf Laidi
CMC Markets NA

Ashraf Laidi is the Chief FX Analyst at CMC Markets NA.

This publication is intended to be used for information purposes only and does not constitute investment advice. CMC Markets (US) LLC is registered as a Futures Commission Merchant with the Commodity Futures Trading Commission and is a member of the National Futures Association.

Copyright © 2006-2008 Ashraf Laidi

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