Next Week's Currency Market Forecast

NEW YORK ( BBH FX Strategy) -- Here is our currency markets forecast for next week.

USD: The dollar is likely to remain firm next week amid concerns that the global economy is losing steam. This dynamic should continue to drive positioning adjustments that are also broadly dollar supportive.

Technical momentum may be supportive for the dollar as well after most of the majors failed to break the top end of their recent ranges. This should result in a reversal in the price action and may lead currencies to test the bottom end of their recent ranges as positioning adjustment continues. But the inability to break key levels means currencies are likely stuck in recent ranges.

On the data front, next week we get more business surveys for March, with the Chicago PMI the key report. Expectations are for a slight decline to 63.0 from 64.0. Next week we get speeches from Plosser, Bernanke, Rosengren, Fisher, Bullard, Lockhart and Lacker (both of which are voters). However, recent economic developments argue that the prospects for QE3 have declined. This is likely to limit the influence that these speeches have on price action.

EURO: The combination of technical momentum and renewed concerns over the euro zone economic outlook should weigh on the euro next week. The euro failed to break through the key resistance level of 1.330, suggesting that a near-term top may be in place. The flash reading of the eurozone PMIs disappointed expectations and failed to break the boom/bust level of 50, adding concerns that the economy has yet to stabilize. Germany's manufacturing PMI even slipped to 48.1 from 50.2 in February.

Next week, Germany's IFO for March should help crystallize the near-term economic outlook. France, Italy and Spain all issue debt, with retail sales in Portugal, Spain and Greece expected to be watched closely. On the policy front, the focus of next week's finance ministers meeting will center on discussions about combining the EFSF/ESM and finding a replacement for Juncker. Germany's finance minister, Schaeuble, is one of the leading candidates.

Key Levels: Resistance at recent low of 1.300; break of recent low opens up a technical target of 1.262, the early January low.

GBP: The combination of the weak February retail sales report and the downwardly revised figures in January brings into question the recent resilience of Britain's economy. The dovish surprise from the recent minutes also keeps open the possibility of another round of QE in May. The potential for further policy easing should remain a headwind for sterling against the dollar but our sterling outlook against the euro remains more constructive amid renewed concerns over the economic outlook in the euro zone.

Key Levels: Resistance seen at 1.588; support around 1.56.

JPY: The dollar is likely to reverse some of its recent gains against the yen after failing to make a convincing break of 84. The end of the fiscal year in Japan should also boost seasonal demand for yen, adding to potential strength in yen against the dollar and the euro. A top in EUR/JPY appears to be in place near 111.0.

This news come against the backdrop of the near substantial yen speculative shorts recorded on the CFTC. The recent improvement in the trade balance is also a source of broad strength of the yen. And finally, lack of interest support from the front-end of the US curve also provides support that the dollar is likely to remain under pressure against the yen.

Key Levels: Resistance around 84.18, support at 82.00.

AUD: Recent data disappointments in China have weighed on the antipodean currencies. Softer domestic data has also increased the probability that the RBA moves to cut interest rates in May. Expectations of a rate cut from the OIS have increased recently, with the OIS now pricing in roughly 60% chance of a rate cut in May, up from 48% last week. Current positioning also leaves AUD and NZD vulnerable to further adjustments.

Key Levels: Resistance at recent high of 1.06, support at recent low 1.023.

Emerging Markets

BRL: More aggressive action by the Brazilian authorities is likely to keep BRL from appreciating in the near term. Continued USD buying intervention by the central bank combined with the threat of more policy action has effectively changed the market psychology towards the assumption that the new floor for USD/BRL is 1.80. Recent press reports suggest accelerating payments of external debt, thereby utilizing dollars that have been accumulated. Minutes to last COPOM meeting reinforce our view that rates likely to trough at 9.0% or at the very least 8.75%. Low IPCA mid-March print suggests COPOM's gamble working for now.

Key Levels: USD/BRL 1.85, 1.90 on the upside and 1.80 on the downside.

INR: We think the rupee will underperform near-term as twin deficits remain an issue. The economy is slowing, with RBI likely to continue easing in 2012. RBI kept rates at 8.50% March 15 after unexpectedly cutting cash reserve ratio by 75 bp to 4.75% March 9. RBI is expected to continue easing, as some officials have not hesitated to highlight the need for monetary easing. RBI will be cautious because inflation pressures picked up a bit, as WPI rose 6.95% year over year in February vs. 6.55% year over year in January. Foreign equity inflow has continued but the pace is decelerating on concerns about continued economic slowdown.

Key Levels: Resistance near 51.63 (retracement from December -February drop). Support near 50.5 (trendline from February) and just below 50 (March lows).

KRW: KRW has been supported prospects of economic recovery, but remains vulnerable to swings in sentiment. BOK said economic slowdown appears to be easing along with more calm in global financial markets, but added downside risks are still bigger than the upside due to external uncertainty.

China slowdown and high oil prices also increase downside risks on the economy. Foreign equity inflow reached $9.3 billion year to date, which exceeds the -$8.6 billion outflow in 2011 but increase in inflow has been stopped. February CPI eased to 3.1% year over year from 3.4% in February, lowest since December 2010 and close to the center of the 2-4% target range. This gives BOK room to ease if needed. February exports rebounded strongly.

Key Levels: Resistance seen near 1133 and 1139 (retracements from January-March drop). Support near 1118 (200-day moving average) and 1112 (March low)

PLN: The zloty has outperformed within CEE due to a more hawkish central bank stance. Besides hawkish comments to the press, minutes from the last meeting show that a majority would not rule out a rate hike, though the exact vote for steady rates then remains unknown. Inflation remains stubbornly high at 4.3% while the economy is showing good momentum. However, we do not think a rate hike is likely or justified in 2012 but the hawkish tilt stands in contrast to Hungary, where the central bank has tilted dovish in 2012.

Key Levels: Resistance near 4.20 (February highs) and 4.26 (200-day moving average). Support around 4.10 (February-March lows.)

ZAR: We expect ZAR to underperform against most other EM currencies on continued economic weakness. Inflation in February was welcome news for SARB, falling more than expected to 6.1% year over year from 6.3% in January. Unfortunately, the best of the rand's performance is behind us, in our view, and with it the prospects of positive inflation pass-through from imported items.

This means SARB will remain in the uncomfortable situation of inflation being too high to allow for easing, while growth is too slow to allow for tightening. For the remainder of the year, we think SARB is on hold due to this policy dilemma. High oil prices pose upside risks for the current account gap, near -4% of GDP last year.

Key Levels: 7.80, 7.88 on the upside. 200-day moving average near 7.63, trendline from August near 7.52 on the downside.

This commentary comes from an independent investor or market observer as part of TheStreet guest contributor program. The views expressed are those of the author and do not necessarily represent the views of TheStreet or its management.

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