Today we are going to focus on the EUR/USD exchange rate and many of you have seen all sorts of timeframes - hourly, daily, weekly. We are going to look at the monthly. We're going to have two charts here and this is going to be a slightly out of what you usually see on the technicals. We're going to concentrate here on the major down legs since the inception of the euro in 1999.

What is important here is that obviously the EUR was technically born in '98 but it actually became a tradeable in January 1999. From January 1999 all the way down to the bottom of 2001 the EUR fell from peak to trough 31 per cent against the USD.

I'm going to go into basically mentioning these and then I'll say the reasons and then I'll say how this current down leg compares to the previous one and why is it important to make this comparison.

So 31 per cent from 1999 to 2001 we fell 14 per cent in 2005, 24 per cent from July 2008 to March 2009 and from end of November '09 until so far, until April 2010 we fell 12 per cent. The key here is to distinguish these declines.

Basically this says this decline in 1999/2001 excessively high rates and over-valued opening price. Basically, the EUR opened in January, actually 4th January 1999, it opened around $1.18 and a lot of people said that it was born too big, too expensive, too overvalued.

And what happened is that in 1999 Germany and the rest of the eurozone was still struggling from the fallout of the Asian crisis while the US was basically eating all the candies from the United States, the stock market being the only game in town because the US equity market was benefiting from the tech bubble. There was not much diversification there. A lot of foreign capital flows were going into the United States.

But what is important is that in this down leg it was very much EUR-centric. Interest rates were too high in the eurozone. They were above 4 per cent and people were saying that they are too high for that growth and that the eurozone is still struggling, they need to cut interest rates and there is still a lot of fallout from Asia. It was really a big mess and anybody who traded FX would remember. Those were very much really EUR-centric here.

In the decline of 2005 (this is very important), if you recall the EUR here bottomed in 2002. The USD peaked, 17 year high in February 2002 and then the dollar started its multi-year secular bear market. And then the USD started to fall in '02, '03, '04 and then the dollar started to go up '05, i.e. the EUR started to fall in 2005. Why?

Well a lot of it had to do with actually the US. It was US-centric. Why? Because the United States, the Federal Reserve, started to raise interest rates in June 2004 whereas the ECB did not raise interest rates until end of '05, December of '05.

So basically, one minor eurozone specific reason was in May 2005. What happened in May 2005? There was the French 'no'. Okay, the French voted in the referendum no against a closer integration in the EU. Then a month later they were followed by the Dutch.

Here again, '99 to 2001 you had eurozone specific reasons. Here you had the US specific reasons.

In 2008 and 2009 when the EUR fell it was mainly because of the deleveraging because commodities went down, the USD went back up because money went back to safety. We cannot say that that is EUR specific reason. We cannot say that that is USD specific reason. It's a little bit of everything. It's really a global issue.

Which brings us to this current decline from late '09 to April '10 and this decline which is so far 12 per cent is, in our perspective here, very much EUR specific. EUR specific because it's eurozone specific.

Ladies and gentlemen, we're hearing about things such as bailouts, such as the collapse of the eurozone which we don't believe is going to happen, but it doesn't matter what we believe is going to happen. What matters is that we have never heard about the eurozone collapsing before. The eurozone is making some measures and some rules as it goes along. We don't know what's going to happen with Greece in July and in December. Will they have paid most of its debt? We are reaching 'unprecedented' times here and these are very much EUR specific, which brings me to what?

Basically, we are down 12 per cent. The last time we had EUR specific, euro zone specific decline it was in '99/2001 and the EUR fell from peak to trough by 31 per cent. Now it has fallen 12 per cent. We think that these factors, these euro specific factors actually as we speak today, the Greek spreads, the 10 year yields, their spreads over the German ones just went to an all time high and the Portuguese ones too and I'm not even going to speak about the USD reason and the Federal Reserve reason why it is helping the dollar because we don't have much time. But we're just going to focus on the EUR here.

So what does this mean? We still, actually since January we've been saying that the EUR is going to go towards 132 and then it's going to test 130, but eventually towards the summer it's going to go towards 127.

One more chart and this is basically again a monthly chart. Basically it shows you a retracement from the 2001 lows of around 84 cents all the way, so you then move from that 2001 lows to the highs of 160 and then you're going to do a retracement and the retracement, ladies and gentlemen, it is going to give you 38 per cent retracement is a 131 and if you remember we hit 131.90 in the week of April 20th. So we did come closer towards 131. But we think eventually we're going to go to the next key retracement level which is basically 122. Actually, between 131 and 122 and that will bring us to 125, which coincides with this trend line support here from the '06 lows through the '09 lows and basically we're going to be testing which is really 125 if really things come really, really to the worse damage that is expected if the Fed is going to start to sell bonds, tighten policy while the ECB remains stuck. We could see that probably in October, but we are looking for 127 towards the end of the summer. There is also the mid-term elections in the United States which could lead to some uncertainty in the stock market and risk aversion plays and that could actually work to the detriment of the EUR.

So the levels here, we are looking at 130 before the end of the current second quarter and then we will be looking at 127 towards the end of the summer.

This is Ashraf Laidi for this edition of CantosCharts. Thank you.