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The Charts That Matter Next Week
FX Sales Strats

Thursday 6th January 2011
John Noyce
John.Noyce@gs.com
+44 20 7774 2915

Goldman Sachs International

From the FX trading desk
This is not research and is not intended as such. This has been prepared by individuals on the
sales/trading desks of the Securities Division. This material does not represent a formal or official
view of Goldman Sachs as the views expressed herein are solely those of the author(s), which may
differ from those of Global Investment Research.

A little further consolidation for EURUSD and then lower?...
The market appears to be tracing out a bearish
triangle continuation pattern which should
eventually yield another significant down move.
Selling a bounce toward the middle of the
consolidation at 1.3250 would seem attractive

ƒ As discussed in the Q1 Outlook piece we distributed
before the festive/new year break, the underlying
setup on EURUSD looks negative (monthly chart
patterns, historic comparisons and signals from
correlated markets all pointing to the downside). The
consolidation seen over the last couple of weeks
GRHVQ¶W appear to change this in any way, over time
lower levels appear likely.
ƒ In terms of pivots from here:
ƒ Resistance on the daily chart should now be
provided by the converged trend across the highs
of the current consolidation, the 55-dma and the
interim high from 14th December; 1.3426-1.3500
ƒ Support, and the most notable downside pivot
which needs to be broken to argue ZH¶UH
beginning the next down-leg, should be 1.3108-
1.3081 where the trend across the base of the
current consolidation and the 200-dma are
converged

ƒ If the recent consolidation is viewed as a classic
triangle consolidation the extension target would be
482 pips (0.0482/4.82 big figures) from the break
point (the trend across the lows) at the time the
Chart Source: Aspen Graphics Data: Reuters
market breaks lower. Therefore if the market broke
down today the target would be 1.2626.
Past performance is not an indicator of future results. Future returns are not guaranteed, and a loss of original investment may occur. 1
Foreign Exchange Strategies - From the Trading Desk

3250 range. Future returns are not guaranteed.+DYLQJDORRNDWWKHLQWUDGD\FKDUWVORRNVWKHOHYHOWRVHOODJDLQVW« Four notable resistance points are converged on 1. the 55. Chart Source: Aspen Graphics Data: Reuters Past performance is not an indicator of future results.3266.3266 ƒ From an Elliott perspective you can argue the market is forming a triangle consolidation which still needs an E-wave back into the centre of the pattern before LW¶V complete.From the Trading Desk . ƒ Assuming this is the correct way to view the current setup (as a bearish triangle continuation pattern within a broader bearish backdrop) the market should find it difficult to bounce materially back above this pivot area.and 200- period moving averages on the 4-hour chart. plus the interim low from Monday this week (the first trading day of the year) all being tightly packed in a 1.3237- 1.3238-1.3266. the ideal target being the centre of the current consolidation which stands at 1. ƒ Interestingly three other notable resistance points are also clustered close to 1. 2 Foreign Exchange Strategies . and a loss of original investment may occur.

The same pattern was posted on 5th and 22nd November last year and the market moved up sharply following both. Chart Source: Aspen Graphics Data: Reuters Past performance is not an indicator of future results. ƒ Overall. 3 Foreign Exchange Strategies .26 big figures from the break point (80. giving us a very strong preference for buying on dips looking for an eventual upside break from the current consolidation.From the Trading Desk .44 appears to be taking the form of a classic triangle continuation pattern (bullish) ƒ On Tuesday this week the market posted a bullish engulfing day (Japanese candle equivalent of a bullish key day reversal) from the converged 55-dma and interim low from 14th December.The USD Index also ORRNVYHU\FRQVWUXFWLYH« The consolidation since the 30th November high at 81. this looks a very constructive picture for the USD Index.47 today. Future returns are not guaranteed. and a loss of original investment may occur. so an immediate break higher would give a target of 82. ƒ If the recent consolidation is viewed as a bullish continuation pattern the target would be 2. ƒ Daily stochastics have also crossed higher from similar levels to those which were seen as the market based on 14th December.73).

our bias would be that a close/break below will eventually take place. but with lower shoulders. The market has so far just managed to avoid a daily close below this particular pivot. :HGQHVGD\¶V daily close was below the neckline of the pattern giving a downside extension target of 1. ƒ Looking at the market from a moving average perspective is also interesting.90. Overall. fitting with other USD +ve signals from correlated markets.95) is only very marginally above the left-shoulder (9th November high at 1. Future returns are not guaranteed. following a not unprecedented but still quite extreme 105 consecutive daily closes above the 55-dma ƒ This really does appear a very clear Head and Shoulders pattern where the Head (7th December high at 1. fitting with the majority of the G10/USD crosses. The market having now made a not unprecedented but still extreme 105 consecutive daily closes above the 55-dma which currently stands at 1. a significant downside Chart Source: Aspen Graphics Data: Reuters correction in gold looks a real risk. Past performance is not an indicator of future results. tend to work less well.57) is very marginally below the head.424.301.69. Put simply it makes it look like a very aggressive pattern.10) and the right-shoulder (3rd January high at 1. but given the structure and extreme period spent above.7KH86'LVDOVRORRNLQJVWURQJDJDLQVWWKHSUHFLRXVPHWDOV« Gold appears to be forming a classic Head and Shoulders topping structure. Similar patterns. ƒ Overall.430. this argues gold is at risk of a significant downside correction. 4 Foreign Exchange Strategies .377.423. and a loss of original investment may occur.From the Trading Desk .

ƒ Looking at the moving average setup.) and likely be a USD +ve from a sentiment perspective. While not unprecedented.668 and the 200-dma then stands another 22. and a loss of original investment may occur. 5 Foreign Exchange Strategies . CAD etc. ƒ In terms of levels from here. Chart Source: Aspen Graphics Data: Reuters Past performance is not an indicator of future results. this is quite extreme.From the Trading Desk . similarly to gold.466.Q (QJOLVK´ we interpret this to mean the net buying interest as the market attempts to make new highs for the trend diminishes each time. the risks of a larger downside correction seem high. This is likely important from an FX perspective as sharp down moves in commodity space would likely have negative implications for correlated currencies (AUD. showing over positioning and/or exhaustion.6LOYHUDOVRORRNVKHDY\RQWKHGDLO\FKDUWV« The market is attempting to break lower from a classic divergent-wedge like pattern which formed from early November onwards ƒ The structure is effectively confirmed by the negative oscillator divergence which is evident on the daily chart (the marginally higher highs set from 8th November onwards were all accompanied by lower highs on the oscillator). Future returns are not guaranteed. ƒ Overall. the market has been above the 55-dma for an extended period (98 consecutive daily closes above up to and including Wednesday). the market KDVQ¶W yet even tested the 55-dma which stands at 27. ³.4% below that at 21.

Future returns are not guaranteed. 6 Foreign Exchange Strategies . if it were achieved. Past performance is not an indicator of future results. i. the downtrend from the June µ07 highs and the interim low from November µ09. 5-year swap rates are at pivot resistance A daily triangle like pattern is forming. but not reversed sharply lower on any kind of sustained basis.28% which is formed by the 55-wma.S. would target 2. This means they are still sat just below major pivot resistance centred on 2.From the Trading Desk . a classic ³6KRRWLQJ 6WDU´ pattern in Japanese Candle terminology ± often the signal of a ³EORZ off WRS´. would therefore be all the more significant as the 200-wma stands up at 3. and a loss of original investment may occur. An upside break from the consolidation would given an extension target of 32bps. Since then yields as viewed via 5-year USD swaps have entered a period of consolidation.66% Chart Source: Aspen Graphics Data Source: Reuters Chart Source: Aspen Graphics Data Source: Reuters ƒ In recent updates ZH¶YH highlighted the weekly exhaustion candle pattern which formed against the spike highs on U.29%. yields in early-December.66% if the break took place today.6RZLWKIRFXVFRPLQJEDFNRQWRWKH86'86UDWHVDUHOLNHO\WREHYHU\LPSRUWDQW« On the weekly chart U. upside break target ~2.e. the downtrend from the June µ08 highs.34%. ƒ Looking at the daily chart (right above) the market is forming what can be viewed as a triangle continuation pattern where the resistance of the pattern stands only a little above current levels at 2. This region VKRXOGQ¶W be easy to break.19-2. but a weekly close above.S.

Future returns are not guaranteed. ƒ The USD Index is weak relative to the current level of USD swaps in simple overlay terms. or at least confirmation of. ƒ From an FX perspective it therefore seems very important to watch what USD 5-year swaps do from here. a break higher in the USD Index. a break higher from the current consolidation (above 2. Chart Source: Aspen Graphics Data: Reuters Past performance is not an indicator of future results.34%) could well be the catalyst for. but that could well be as a result of other G10 yields rising too. 7 Foreign Exchange Strategies . and a loss of original investment may occur.7KHFRUUHODWLRQLVQ¶WSHUIHFWEXWLWORRNVOLNH86UDWHVGRPDWWHUIRUWKH86'« This chart shows USD 5-year swaps overlaid with the USD Index ƒ Both USD 5-year swaps and the USD Index have formed triangle like consolidations over the past month.From the Trading Desk . ƒ Importantly the cycle lows were however both set on the same day. 4th November '10.

Simply put. this really looks like a multi-year turn in trend. and a loss of original investment may occur. Past performance is not an indicator of future results. EURINR and EURIDR.In line with a theme of USD-strength/EUR-ZHDNQHVVDQGVWURQJDVVHWPDUNHWV« «WKH(85(0-Asia basket we watch (where short exposure is one of our favourite themes for Q1) is beginning to break lower from its consolidation Chart Source: Aspen Graphics Data Source: Reuters Chart Source: Aspen Graphics Data Source: Reuters ƒ As a reminder these charts show the performance of an equally weighted basket of relatively liquid EUR/EM-Asia crosses. The daily chart (left above) is now beginning to accelerate lower following a break of the uptrends from the May and June µ10 lows. the uptrend from the September µ00 lows broken decisively in January last year. followed by a sharp fall during the first half of 2010 and then a very overlapping/corrective consolidation/recovery during the second half of last year which the market is again breaking lower from. EURTWD. EURPHP.From the Trading Desk . The weekly chart as previously discussed looks incredibly heavy. EURKRW. with it now turning quite aggressively lower following a near-test of the 55-wma as resistance in October. Overall significant out- performance of the EUR by the EM-Asian currencies appears likely over the coming months. 8 Foreign Exchange Strategies . EURTHB. EURSGD. Future returns are not guaranteed.

and a loss of original investment may occur.W¶VMXVWEUHDNLQJORZHUIURPWKHWULDQJOHOLNH pattern which formed during the second half of 2010. which is very similar to the pattern which IRUPHGGXULQJ+µIRUPZKLFKWKHPDUNHW also accelerated lower in January last year ƒ The extension target of the pattern is approximately 1. 9 Foreign Exchange Strategies . significant further downside appears likely over the coming weeks.2IWKHYDULRXVFRPSRQHQWV(85.5:LVFXUUHQWO\RQHRIWKHPRVWLQWHUHVWLQJ« .386. Chart Source: Aspen Graphics Data: Reuters Past performance is not an indicator of future results. Future returns are not guaranteed. ƒ Overall.From the Trading Desk .

9033 and appears likely to be tested and eventually broken. Future returns are not guaranteed. however. double top neckline formed by the February µ06 low the market has moved sharply lower. eventually.994 (just under 14% below current levels). arguing that the market further downside seems likely with the ultimate double top target standing down is focussed on this particular cross. Past performance is not an indicator of future results.From the Trading Desk . significant ƒ EURMYR has respected pivots well over recent weeks.The other two EUR/EM-$VLDFURVVHVZHSDUWLFXODUO\OLNHDUH(857:'DQG(850<5« (857:'KDVGURSSHGVKDUSO\DQGLVQRZWHVWLQJWKH-XQH¶ORZ (850<5KDVDOVRGURSSHGIROORZLQJ1RYHPEHU¶VEHDULVKUHYHUVDO Chart Source: Aspen Graphics Data Source: Reuters Chart Source: Aspen Graphics Data Source: Reuters ƒ Consolidation around this level is possible. 10 Foreign Exchange Strategies . The June µ10 low here stands down at 3. Following 1RYHPEHU¶V peak against the at 32. and a loss of original investment may occur.

34 and the 55-dma. Chart Source: Aspen Graphics Data: Reuters Past performance is not an indicator of future results. ƒ Overall. further upside for USDJPY does seem quite feasible and an attractive theme to position for.From the Trading Desk . ƒ In terms of levels on the daily chart the market has now closed above the interim low from 7th December at 82. ƒ This should be a supporting factor for our bullish- CNYJPY Favourite Tactical Theme for Q1 as USDJPY is the side of the trade which generates most of the volatility. 11 Foreign Exchange Strategies . and a loss of original investment may occur. taking into account the extreme under- valuation of USDJPY versus GS 5HVHDUFK¶V GSDEER FX Fair Value Model (USDJPY is around two standard deviations under-valued on this measure.86'-3<EHJLQVWKHQHZ\HDURQDVWURQJQRWH« On Monday (the first trading day of the year) the market posted a bullish key day UHYHUVDO« ƒ «the last time a daily reversal pattern was posted on the first true trading day of the year was on the 2nd of January µ08 where it posted a bearish key day and proceeded to fall sharply into March of that year. an extreme which is usually not sustainable). ƒ Coupled with this daily oscillators have turned higher from the base of the range for the first time since late-October. Future returns are not guaranteed.

Future returns are not guaranteed. ƒ The technical setup is pretty clear: ƒ In early-November and late-December the market double-topped against 1. 12 Foreign Exchange Strategies . ƒ A final point worthy of note is that the 55-dma is now very gradually downward sloping which argues that the momentum of the up move during H2 µ10 has been lost.02 ƒ . while already a popular theme going by feedback ZH¶YH received from internal and external conversations. it often being used as a China/U. Past performance is not an indicator of future results.9251 ƒ The other level to watch closely is the 200-dma at 0. would target 0. this still seems a decent risk/reward Chart Source: Aspen Graphics Data: Reuters and well reasoned trade.S.W¶V since moved sharply lower and if viewed as a double top in the process of forming the neckline stands at 0.9729 as an initial target (the 2nd December low) ƒ A break below the neckline. out-SHUIRUPDQFHWUDGHVKDYHFRPHLQWRIRFXV« AUDCAD is one of the most popular.S.From the Trading Desk . completing the pattern. relative performance proxy ƒ The fact that the market moved up so significantly during the second half of 2010 also likely makes it an attractive ³UHODWLYH YDOXH´´PHDQ UHYHUVLRQ´ type trade. and a loss of original investment may occur.U.9508 as this particular moving average is receiving increased focus across the major FX pairs. ƒ Overall.

From the Trading Desk . as with the EUR/EM-Asia crosses you can make a case that a large topping structure is forming on EURMXN ƒ In March/April µ10 the uptrends from the April µ02 and December µ05 lows were broken quite decisively. Chart Source: Aspen Graphics Data: Reuters Past performance is not an indicator of future results. a break below would if it occurred this month would give a downside extension target of 10. this chart. The later was then re-tested as resistance in October and the market has again subsequently sold off sharply. 13 Foreign Exchange Strategies .4602. ƒ Overall. and a loss of original investment may occur. as with the EUR/EM-Asia crosses. Future returns are not guaranteed.4711. ƒ Looking at the market from a multi-month perspective you can now argue that a multi-year H&S top is in the process of forming. The neckline of the potential pattern stands at 15. argues that the trend of EUR out-performance of EM currencies which was prevalent throughout much of the last decade is in the process of turning and we could well be looking a significant trend in the opposite direction beginning.1UHODWHGFURVVHVDUHDOVRLQWHUHVWLQJ« As discussed in the last weekly chart pack of December.$ORQJWKHVDPHOLQHV0.

from that ZHHN¶V closing level the market bouncing over 18% into the April µ09 high. out- performance via a US-linked-long-MXN-leg and an inherent long-USDJPY position via the short-JPY leg ƒ As discussed on slide 11. and a loss of original investment may occur. ƒ To put things into perspective.$QRWKHUUHSUHVHQWDWLRQRIWKHVDPHWKHPHZKLFKVHHPVWRPDNHVHQVHLV0. looking for attractive risk/reward ways to position short of the JPY seem to make a lot of sense given that 86'-3<¶V valuation continues to look extreme versus GS 5HVHDUFK¶V FX Fair Value Model GSDEER.7190 for the 5pm NY close on Friday. ƒ A similar pattern was posted from the cycle lows in February µ09 and worked very well. ƒ Looking specifically at MXNJPY. the pre ³)LQDQFLDO &ULVLV´ peak) and this week will post a bullish weekly reversal pattern if the market can close above 6.From the Trading Desk . 14 Foreign Exchange Strategies .e.1-3<« This should be an interesting play on U. Chart Source: Aspen Graphics Data: Reuters Past performance is not an indicator of future results. the top of the range where the interim highs from April ¶09 and April µ10 are converged stand approximately 13-14% above current levels.S. Future returns are not guaranteed. the market has broken the downtrend from the August µ08 highs (i.

Chart Source: Aspen Graphics Data: Reuters Past performance is not an indicator of future results. we do feel the seasonals and the way GBP has recovered sharply in the first few trading days of the year means we should give it the benefit of the doubt until the end of this week.*%3SHUIRUPHGSRRUO\LQ'HFHPEHUEXWKDVWUDGHGPXFKEHWWHUVRIDUWKLV\HDU« This fits with the seasonals for GBP on a TWI basis (see next slide) and has enabled our GBP/Broad Index(*) to bounce sharply to re-test the old lows from October and March last year as resistance ƒ Our GBP/Broad Index shows the performance of GBP versus an equally weighted basket of the other ³2OG World G10´ currencies.From the Trading Desk . Future returns are not guaranteed. If it LVQ¶W able to close back above it would look more like a true range break and ZH¶G seriously consider closing/exiting the bullish-GBPCHF theme. and LW¶V a product of the Securities Division of GS. ƒ If the GBP/Broad Index is able to close back above the old lows from March/October ¶10 it would seem to indicate that 'HFHPEHU¶V weakness was an ³DQRPDO\´ or false break in more technical terms. ƒ While the weakness in GBP seen during December was certainly not something we expected and has made our bullish-GBPCHF Favourite Q1 Theme ³XQFRPIRUWDEOH´ to stick with. 15 Foreign Exchange Strategies . and a loss of original investment may occur.

$UHPLQGHURIWKH*%37:.VHDVRQDOV XVLQJ(85*%3DVDSUR[\.

« December tends to be a particularly bad Count up/down and average %age change for EURGBP from month for GBP (it tends to weaken). 2 0. 4 ƒ So far things are playing out in a similar fashion this 1 time around.5 -4 -1 -6 -1.5 -8 -2 -10 Average %age Change Count Up Count Down Chart Source: Aspen Graphics Data: Reuters Past performance is not an indicator of future results. it tends to be a particularly good 2. January is 'HFHPEHU¶RQZDUGV the opposite.From the Trading Desk . 16 Foreign Exchange Strategies .5 10 month (it tends to strengthen) ƒ The chart opposite shows the average monthly %age 2 8 change for EURGBP in blue and a count of the number of times each month of the year has 6 recorded a positive close in green or a negative close 1. Future returns are not guaranteed.5 0 0 -2 May July October November January March September December June April August February -0.5 in red from December ¶98 onwards. and a loss of original investment may occur.

8760. If EURPLN makes this break LW¶V going to be extremely difficult for HUF to out-perform in the cross and certainly would make it extremely unlikely to be an out-performing trade particularly versus outright short EURHUF. and a loss of original investment may occur. ƒ How things develop here will also be very important for our Bearish-PLNHUF Favourite Q1 Theme. ƒ In conclusion a very important weekly close to watch.From the Trading Desk . 17 Foreign Exchange Strategies . Chart Source: Aspen Graphics Data: Reuters Past performance is not an indicator of future results. Future returns are not guaranteed.4587.9036-3.(853/1LVDWWHPSWLQJWREUHDNORZHUIURPLWVUHFHQWWULDQJOHOLNHFRQVROLGDWLRQ« Three important pivots are converged on 3. if a weekly close can be made below this region it would argue a material downtrend is beginning ƒ If the weekly closing break is achieved it would give a triangle extension target of 3.

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