Tue, Jan 6 2009, 10:05 GMT
by Nicole Elliott
Comment: December’s massive rally from a ‘triangle’ base underlines the fact that October’s drop was a move in the ‘wrong’ direction caused by the unwinding of leverage trades. We have formed an important interim low in the very long term trend to Euro strength that started in 2001, recovering 50% of prior declines. Over the coming month we feel the Euro should consolidate around current levels, below 1.4600 and probably no lower than the 1.3200 area. Dips are seen as buying opportunities for an eventual break above the psychological 1.5000 area.
A weekly close above 1.3000 would force us to adjust.
Comment: Sterling, last year’s worst performing currency, continues its feeble attempt at forming a base against the US dollar. For three consecutive months it has been working in a downward-sloping ‘wedge’ formation with a third (and hopefully final) downside test over the New Year. This is part of a complex process of forming an interim low point after last year’s extraordinary correction lower. A weekly close above 1.5700 is the minimum required to signal the process has reached a conclusion.
A monthly close below 1.4000 forces us to review.
Comment: Very difficult know what to expect over the coming month so, without trying to hedge our bets, we favour random messy consolidation sideways. At-the-money implied volatility has collapsed (though holding above one standard deviation from the long term mean at 14.25%) and should hold below the 22.00% area. Rallies will probably be capped at 96.00 this fortnight and trade no higher than 100.00 over the month. These are seen as selling opportunities for a subsequent re-test of last year’s low at 87.12 and then the pivotal 85.00 level later on.
A weekly close above 99.00 would force us to adjust.
Comment: Journalists, sharpened pencils at the ready, and too many others are waiting with baited breath to see the pound trade at parity to the Euro; they may be disappointed. After the biggest ever quarterly loss (27% of its value), and worth about half of what it did at its peak, hoping for a lot more might be asking too much. Cycle theory suggests sterling will be at its weakest this month or in February, so we favour a topping process against the all-time high at 0.9805 this month. From a record high bullish momentum has collapsed and at-the-money implied volatility remains close to November’s record. This month’s range is likely to be big again, roughly between 0.9000 and 0.9600.
A weekly close well below 0.9000 would suggest a high point might be in place.
Comment: Downside momentum in Yen crosses ran out of steam last month, perhaps not surprising after the biggest ever quarterly drop and a gain of 21% over the Euro in the last year. Bearish momentum is less than half the record set in November and likewise one-month at-the-money implied volatility. Therefore we expect a series of random moves roughly between 118.00 and 130.00 this month, potentially with a small short squeeze towards 135.00 and probably no higher than 140.00.
A weekly close above 140.00 forces us to review.
Comment: Sterling was the currency that lost the most against the Yen last year, no mean feat at a whopping 58% of its value. The move is perhaps a little overdone short term and at-the-money implied volatility is half of November’s peak. Therefore we feel that a small short squeeze higher from the downward-sloping ‘wedge’ formation is possible this month, probably no higher than 148.50. Adding weight to this view is that we are hovering just above April 1995’s all-time low at 128.20.
A weekly close above 160.00 hints that an important long term low might be already in place.
Published on Tue, Jan 6 2009, 10:21 GMT
Mizuho Corporate Bank
| 1-3-3, Marunouchi, Chiyoda-ku, Tokyo 100-8210
http://www.mizuho-cb.co.uk | Nicole.Elliot@mhcb.co.uk
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