Hello and welcome to this edition of CantosCharts. This is Ashraf Laidi of Intermarket Strategy.

We are going to be looking today at the EUR/USD exchange rate. We're going to start with the monthly and we are going to go into the daily. A very busy chart here. What does it mean? Well let's look top down approach, top down approach.

What does this say here? Well, before we will say what it says let's just look at this. This is the monthly charts starting from September 2006. What does it tell you? This upward cycle here number one, number two and number three. Number one upward cycle, it started basically when the Federal Reserve was done with interest rate hikes which was in June, I believe, 2006 and when the European Central Bank was just getting warmed up, like Al Pacino one day, he said 'I'm just getting warmed up.'

The ECB started to raise rates in December 2005. Six months later the Federal Reserve stopped. The ECB continued until summer 2008. When that contrasting rate hike, interest rate disparity happened in favour of the eurozone, the euro could only know one thing - go up. Then we got to the big problem July 2008. Alright, that's when the ECB stopped raising rates and then we had subprime and everything came down, risk aversion, money went back into the US dollar.

Cycle number two, what happened? Oh, look at that. March 2009 the Federal Reserve started QE. Officially, they started to buy bonds in March 2009, but it was a signal back in December 2008 when the Federal Reserve took interest rates to 0.5%. So that basically said that the Fed is going to do QE. When that happened, basically, that helped the euro because it's bad. The low interest rates, very low interest rates for the US, dollar goes down and the euro goes up. You see where this is going don't you?

The next cycle, what is this? June, July, September 2010. If you were paying attention to two days' ago, to the CantosCharts that we said what happened. September, August 2010 it was Jackson Hall at the gathering of the central banks that is organised by the Kansas Federal Reserve where basically the Federal Reserve all but said that they were going to do QEII. QEII (Quantitative Easing II). Everybody said that's it, the Fed is going to do it in October. In November they did it. In November people basically sold the dollar and bought anything above it. What happened? The euro went up right.

So what do we do now? Up cycle, it was interest rate cuts by the US or QE, or actually nothing in the US but in the eurozone rate hikes. Came down, then you had an up cycle because of the same thing because of QEI, QEII.

Here is the question ladies and gentlemen, euro risks breaking below key 137 if the Fed runs out of easing steps and the ECB is forced to buy eurozone bonds on QE. What does that mean in English? That means that the only way for the euro to continue to push higher and higher is for the Federal Reserve to have an efficiently aggressive QE that will be so bad for interest rates, so low, that will send the dollar so low and the euro so up so much higher.

Anything short of that it will not be good enough for the euro because you see the euro is really rising on these easing steps by the Fed. If the Fed does not do a big enough QEIII, or it will not do basically anything that is easing enough, it will be actually quite bad for the euro and the euro would do what we think it is going to do which is fall, which is basically you see these cycles. You've got a lower higher, high, lower high, lower high. You come down, you come down. By the way, this thing here, it came down around 20%. This thing here came in around 22%. For this thing to come 22%, we need to go towards 118.

So what does that mean? What does that mean? The big, big, big support there are very key supports. There is 140.20 which is the 200 week moving average. There is the 200 day moving average around 139 and change, but the big support ladies and gentlemen is 137. 137.

If the Federal Reserve's easing steps are not deemed efficient, or let's say if they do it but something so bad happens from the eurozone, nobody said we're going to bail out Italy because it's too big, so let's put an EFSF on it, the Eero could come down below 137.

As I speak to you today ladies and gentlemen, I say that the bias right now in Intermarket Strategy, our bias is for the euro to break below 137.

What do I mean by bias? It means that we are tending, if we were basically to have to decide, we will say that we are likely to break that in the next few months and the stochastics are very important right here. So basically, the chart is telling the story.

This is the EUR/USD weekly chart and the EUR/USD weekly chart, this is the 200 week moving average, 200 week moving average and it does show you that the support is 140.28.

We respected it, we respected it, we respected it, we respected it okay. Yes, we broke below it but we did not close below it, so that is very important. You've got a trend line right here, a wedge here. Again, before we get to that big kahuna of a support at 137 we need to look at 140.28, 140.30. This is a very important level. We respected it. It's going to take a while. The summer is still long, but I think there is a risk that towards the end of September I think we are going to be testing below 137.

And last but not least, we are going to look at a chart that is not commonly seen here which is the volatility chart for the one month volatility for the EUR/USD.

And basically, as this goes up, the EUR/USD actually goes down. Okay, this is the volatility and it's the implied volatility of the one month for the EUR/USD. It's a daily chart and what it shows, it shows that we remain in an upward trajectory channel here and as we push higher, we broke below this trend line as we pushed higher towards the 15 and 16.

This could be lending support to the argument that we talked about in the monthly chart which is basically for a lower euro. The stochastics for the volatility chart are pushing higher here and look at that. Each time we went above here and above that there is likely here to push higher, so this is very, very important. This is not the most compelling case for why the euro is likely to go down, but it is something very, very interesting to consider and to look at.

It actually had been a very good way to predict what the euro did. I remember in mid June here we had a nice decline in the volatility right here which actually led to a rise in the euro. This was in mid June. But now that we're pushing higher here, it is a good signal that we could be coming down. Look at the 140.28, 140.20 in the EUR/USD and then if we break below that, 137 could be the next level.

Ladies and gentlemen, we hope you enjoyed this edition of CantosCharts. It has been Ashraf Laidi of Intermarket Strategy. Thank you.