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Quarterly Technical Analysis

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The rally late in March 2009 forced the dollar higher than we had expected

Thu, Apr 9 2009, 14:47 GMT
by Nicole Elliott

Mizuho Corporate Bank

Quarterly Outlook for EUR

Comment: Price action so far this year has seen the Euro hold above 1.2400 (not the 1.2500 we said three months ago) while rallies have been more subdued than allowed for. Understandably one-month at-the-money implied volatility slumped from a record high at 28.00% in October to a low at 14.60% today; this should trade between 14.00% and 22.00% this quarter. Prices should now hold above the 1.3000 area setting up for a re-test of the increasingly important 1.3800-1.4200 band. A weekly close above here, probably mid-May, should set off a short-squeeze to 1.4800/1.5000 and possibly as high as 1.5500 if bullish momentum builds significantly.

A weekly close below 1.2400 forces us to review.

Quarterly Outlook for GBP

Comment: The interminable downward-sloping ‘wedge’ formation’s ‘extension’ low at 1.3500 may mark an important interim point but only a weekly close above the psychological 1.5000 confirms this. It should also help turn momentum bullish in what might be a fairly explosive rally – thereby keeping one-month at-the-money implied volatility above 13.85% (2 Standard Deviations from the mean since 1995), well above the long term mean at 8.45%. Expect a re-test of December’s high at 1.5725 within the next six weeks, and a rally as high as 1.6500 the very end of Q2/early Q3 2009.

A monthly close below 1.4000 forces another re-think.

Quarterly Outlook for JPY

Comment: The rally late in March 2009 forced the dollar higher than we had expected, taking consensus opinion completely by surprise and forcing a major shift in economic forecasters’ views (February’s three-month target was 91.00 dollar/Yen replaced by 99.00 in April 1st’s FOREX/POLL). Over the next three months we favour another upside probe, possibly a fairly dramatic ‘spike high’, up to the 106.00/107.50 area so that one-month at-the-money implied volatility remains between 14.00% and 22.00%. Very late in Q2 2009 or early in Q3 we favour a drop back below 98.00, which in turn should send prices tumbling to 85.00 in H2 2009.

A weekly close below 98.00 hints that an interim high is already in place and prices will turn sharply lower.

Quarterly Outlook for EUR/GBP

Comment: Euro/Sterling was capped under 0.9600, as expected, and dropped to 0.8800 a lot sooner than we had thought. The massive prices swings of the last three months kept one-month at-the-money implied volatility between 16.00% and a record 21.55% until very recently. It has now collapsed to 13.00%, though this is still over two standard deviations from the mean since the Euro’s introduction – something which should continue for the next three months (we expect it to hold roughly between 11.00% and 17.00%). During Q2 2009 the cross will probably be capped at 0.9400, dropping to 0.8800 this month, February’s low at 0.8635 in May, and 0.8500 in June. If anything momentum might be stronger than estimated and therefore moves will be sooner in time a take declines further (say to the 0.8300/0.8400 area).

A weekly close above 0.9600 forces us to adjust and review yet again.

Quarterly Outlook for EUR/JPY

Comment: Yen crosses are moving as forecast, coming to a juddering halt following last year’s catastrophic collapse. They have at last started to squeeze above trading ranges established in October and should continue to probe cautiously higher over the next month or two. Assuming things don’t get too out of control, we continue to feel this rally ought to be capped around 140.00/142.00, leading to an eventual retreat back below 130.00. There is however a small chance that bullish momentum builds more than expected, leading to an ‘extension’ towards 149.00.

A weekly close well below 130.00 suggests an interim high is already in place.

Quarterly outlook for GBP/JPY

Comment: Following an ‘extension’ to a new all-time low at 119.00, this cross has then managed to squeeze higher meeting our first target at 150.00. Over the next three months we favour a series of halting, cautious upside probes, possibly with fairly sharp price swings along the way making progress difficult and tiring. We feel this should eventually end, possibly very abruptly, at the end of Q2 2009, around the 165.00/170.00 area. Then a lot more messy broadly sideways work either side of 135.00.

A monthly close below 140.00 suggests an interim high is already in place.

• Download full EUR analysis with charts
• Download full GBP analysis with charts
• Download full JPY analysis with charts
• Download full EURGBP analysis with charts
• Download full EURJPY analysis with charts
• Download full GBPJPY analysis with charts

Published on  Thu, Apr 9 2009, 14:54 GMT