[Jason_Lim]

The chart above has been the favourite USD chart since 2004 and compares the present USD bear market since 2002 with that seen in the last USD bear market that began in 1985.(EURUSD today compared with EURUSD as its components then)

• EURUSD rallies 1985-1987 and 2002-2004
• EURUSD falls 1988 and 2005
• EURUSD rallies 1989-1991 and 2006-2008 (Amazingly in both these periods we had a dynamic of

o Housing market downturn and Credit squeeze)
o Banking stresses (Savings and loan crisis in 1989-1991)
o Economic recession
o Major Fed easing cycle (Fed eased from 9.75% to 3% between 1989 and 1992.Easing began much quicker than in this cycle and scope for easing was greater given a starting point of 9.75%)
o Curve steepened with 2’s versus 5’s (Our favourite)going from -20 b.p.’s to + 160 b.p.’s in both instances

Within this the dynamic on what EURUSD did in the periods from the renewed rallies that began in 1989 and 2005 is very interesting

Comparison of 1989-1992 and 2006-2009


• 1989-1991 EURUSD rallies from 1.0114-1.4212(Just under 41%) over 20 months
• Late 2005/early 2006 to 2008 EURUSD rallies from 1.1640 to 1.6040 (38%) over 32 months. Most of this move took place between Feb 2006 and April 2008 (26 months)
• 1991 EURUSD fell from 1.4212 to 1.1160 (21.5%) over 5 months
• 2008 EURUSD fell from 1.6040 to 1.2329 (23% over 3 months)
• 1991-1992: EURUSD surges from 1.1160-1.3525 (21%) over 6 months
• 2008-2009: EURUSD goes from 1.2329-1.4845 (20.4%) over 10 months (With a very choppy interlude between November 2008 and March 2009 during the final blowout of “financial de leveraging that saw it rally to 1.4720 quickly and then give up those gains very quickly.)

While all of these moves are not identical in time and depth they remain very similar in the big picture. So what now?

After that peak in early 1992 the rally in EURUSD was not over but we did see a pause.

EURUSD did fall from 1.3535 to 1.2125 (10.35%) over 2 months before a subsequent rally from 1.2125 to 1.4577(Another 20% move) over the following 5 months

A replication of that now would give parameters in the region of 1.3310 by November and then a re-test of 1.60+ by end Q1 to start Q2 2010.

Are there any indicators that are suggesting such a dynamic- particularly the correction lower in the near term?

EURUSD-Weekly chart


• In Nov-Dec 2008 EURUSD bounced from 1.2329 to 1.4720 (23.91 big figures before falling again)
• Between March and Sept this year it bounced from 1.2457 to 1.4845 (23.88 big figures) in a move slower in time but almost identical in magnitude to the prior rally
• Both last week and the week before it move decisively above the 1.4720 level (1.4845 and 1.4768 respectively) and looked set for a weekly close above. On both occasions it failed to get that weekly close
• The present weekly pattern (Obviously this is only Tuesday) has a very evening star-like formation to it. (Sharp up week followed by indecisive week at the high and potential for a sharp down week) This would be a quite bearish signal if sustained for a weekly close • On top of this some non technical dynamics are

o EURUSD has struggled in recent days to hold up despite a positive risk climate and Equities remaining near their highs
o Rhetoric about the need for a strong USD seems to be growing (Particularly in Europe)

On the daily chart EURUSD is looking a little stretched also

EURUSD-Daily chart


• So far holding above the break area (1.4440-1.4545) with further trend line support at 1.4384
• Remains elevated relative to the 55 day moving average (1.4355) with a large gap to the 200 day moving average at 1.3677
• Note of interest: That puts the 200 day moving average 11.68 big figures below the high. Why is that interesting???
• Outside of 2 event driven moves (HIA demand in 2005 which saw EURUSD fall from 1.3670 to 1.1640 and the funding squeeze of 2008 into early 2009 which saw EURUSD fall from 1.6040 to 1.2329) the most aggressive high to low moves seen in EURUSD were

o 1.1935-1.0762 (11.73 big figures) between June and Sept. 2003
o 1.2930-1.1760 (11.70 big figures) between Feb and April 2004.

In addition to the above the USD-index tested but held strong support last week at the level in Sept 2008 that yielded a strong rally.


• Which was also very close to the 76.4% pullback o the July 2008 to March 2009 rally.
• It is now testing good resistance around 77.40-70

To sum up while we do not see anything at this point that changes the more medium-term bearish USD view there is more than enough in the charts above to suggest caution at this point.

A consolidation and possibly reasonably deep correction to recent USD losses in the weeks ahead remains a danger hence our recent more cautious stance.

A weekly close back over 1.4720 would be the minimum needed now to allay these concerns.