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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

Mon, Jul 6 2009, 09:44 GMT
by Nicole Elliott

Mizuho Corporate Bank

Quarterly Outlook for EUR

Comment: Despite rallying to the increasingly important 1.3800-1.4200 band, as expected, one-month at-the-money implied volatility has been very subdued holding around 14.00%. Perhaps this reflects consensus opinion where the latest poll has views in an increasingly narrow range just below current prices. A weekly close above 1.4200, hopefully this month should set off a short-squeeze to 1.4800/1.5000 where another round of consolidation is due. If anything the Euro is likely to overshoot late Q3/early Q4 2009 as year-end pressures start to build.

A weekly close below 1.3600 forces us to review.

Quarterly Outlook for GBP

Comment: Having rallied easily to our target at 1.6500 it is interesting that one-month at-the-money implied volatility has been lower than expected, possibly because many have missed Cable’s move. Consensus opinion is that the pound should lose a little ground over the next twelve months, some fairly aggressive bankers’ forecasts for the coming six months. We disagree and continue to favour generalised US dollar weakness until at least year-end. We feel this currency pair should rally to 1.7000 within the next month or so, probably reaching our measured target at 1.7400 within two months, followed by consolidation below here. If anything once again we may have underestimated bullish momentum which remains close to its strongest in fifteen years.

A monthly close below 1.5775 forces us to adjust.

Quarterly Outlook for JPY

Comment: Only a few die-hard Yen fans remain, ourselves included, in the latest FX poll. Price action over the last three months has been a lot more subdued than we had thought, so that one-month at-the-money implied volatility held around the 14.00% area, and looks like a potential ‘head-and-shoulders’ pattern. Hopefully this month we shall get the decisive break below the pivotal 94.00 area that we have been watching for. This should then send prices crashing to 88.00 and then very slowly lower still as we cautiously test the key 87.00/85.00 point. The closer we get to here, the greater the jitters and the likelihood of intervention.

A weekly close above the psychological 100.00 forces us to review.

Quarterly Outlook for EUR/GBP

Comment: Interesting to see how public opinion has shifted with not one single forecaster talking about parity in the latest Reuters FX Poll. Instead, because Euro/Sterling continued to trade lower over the last three months meeting our more generous target at 0.8400 with bearish momentum stronger than any equivalent in the last twenty years, analysts’ views have moved down in tandem. One-month at-the-money implied volatility held above 11.00% most of the time though well below January’s record. Expect something similar if slower over the next three months. First of all allow for up to one month of hesitation above 0.8400 because this pivotal level is two standard deviations from the mean of the last twenty-five years. Rallies, which are seen as selling opportunities, should be capped by the top of the Ichimoku ‘cloud’ around 0.9000/0.9100. A weekly close below 0.8400 later in this quarter targets 0.8200 where we shall allow for more consolidation either side of here.

A weekly close above 0.9100 forces us to adjust.

Quarterly Outlook for EUR/JPY

Comment: Yen crosses continue to be difficult to predict as they move broadly sideways in big bands this year. These have spent the last three months consolidating and/or inching to new highs while holding in the upper half of the range so far. While we cannot rule out an ‘extension’ towards 149.00, we continue to feel this year’s rally ought to be capped between June’s high at 139.25 and the top of the weekly ‘cloud’ and Fibonacci resistance at 140.00/142.00. Slow toping activity in July should eventually lead to a retreat through recent lows at 131.40 to the centre of this year’s broad trading range at 126.00.

A weekly close well below 132.00 suggests an interim high is already in place.

Quarterly outlook for GBP/JPY

Comment: Having rallied all this year in a channel, as expected, we are now looking for signs of topping between June’s high and the lower edge of the Ichimoku ‘cloud’ at 162.50, and the 167.00/170.00 Fibonacci retracement area. This process is likely to be halting and slow, mirrored in a whole series of other Yen crosses, leaders and laggards pulling each other in different directions and probably holding above the psychological 150.00 point. Very late in Q3/early Q4 2009 allow for a second drop to 140.00.

A monthly close above 170.00 forces us to review.

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Published on  Mon, Jul 6 2009, 09:55 GMT