USD/JPY
Chart Levels: Support 114.00..113.75..112.60..111.60.
Resistance 115.44..116.00..116.50..118.00
Last week’s ‘spike high’ under the Ichimoku ‘cloud’ two weeks after the very big ‘bearish engulfing’ candle that peaked at the top of the cloud and the 26-day moving average adds weight to our view that the next decent move will be south. Expect hesitation and cautious moves this week as we toy with a band of important support roughly between 114.00 and 112.00. A weekly close below here completes a very large ‘broadening top’ formation, a pattern that looks like a megaphone. Futures positions are still almost half of what they were at June’s peak. This pair will gather downside momentum if it holds below 115.60 this week. We target 110.00 and 105.00 long term.
EUR/USD
Chart Levels: Support 1.4375..1.4300..1.4200..1.4100.
Resistance 1.4530..1.4550..1.4600..1.4750.
Closing at a new record high for a third consecutive week. Investors are getting used to these terribly high levels and the record high at 1.4530 has matched the previous record based on USD/Deutschemark whose all-time low (1.3455 March 1995) is equivalent to a EUR/USD 1.4535. The Euro is not as overbought as many might think and open interest, while increasing, is still well below September’s peak. Remember, what we are witnessing is generalised US dollar weakness where the Euro is in the middle of the pack. Over the last three months the US dollar has lost 13% against the Canadian dollar, 8.50% against the South African rand and Brazilian real, 5% against the Euro.
EUR/JPY
Chart Levels: Support 165.00..163.00..160.50..159.00.
Resistance 167.30..167.75..169.05..170.00.
Price action so far this year in all Yen crosses takes the shape of a highly irregular ‘triple top’ and might mark the end to the rally which started in 2001. Note that in 1987 and again in 1992 EUR/JPY peaked around the 170.00 area. Therefore we continue to watch for signs of topping. If we are correct we favour a sharp sell-off this month to 158.00, maybe even 154.00. A weekly close below this point would complete this massive topping formation and send the cross tumbling to 144.00 medium term. Note a similar pattern can be seen in CHF/JPY, KRW/JPY, and SGD/JPY, so it is a Yen move and not the Euro. Implied volatility is likely to remain well above the average of the last two years.
GBP/JPY
Chart Levels: Support 235.00..233.00..230.00..228.00.
Resistance 240.00..241.50..245.00..251.15.
Topping again at the same level that held in January and potentially a massive ‘head-and-shoulders’ top where the ‘right shoulder’ is at the same level as the left one. Other Yen crosses look less top-heavy but most have some sort of variation of a ‘triple top’. Note that many major equity indices have similar patterns and the question of how plentiful, and how ‘cheap’ money really is should come to dominate analysis over the coming month. A weekly close below the ‘neckline’ at 246.00, ending a long term rally that started in September 2000, should send this pair tumbling to 200.00 medium term. Something similar, at similar levels, happened in September 1998. Implied volatility should hold around 13.00%.
GBP/USD
Chart Levels: Support 2.0750..2.0650..2.0565..2.0400.
Resistance 2.0900..2.1000..2.1100..2.1250.
The strongest daily and weekly close in twenty-six years should make the lazy and complacent sit up and listen. Cable is surprisingly not overbought. In October 1980 it traded at 2.4500 having touched a low of 2.1400 in April that year. Many are now beginning to factor in 2.1000 for this pair, a target we have held since July 2004. Our patience appears to be paying off and for hedging purposes we warn that our target might now be considered conservative. Persistent and possibly chronic US dollar weakness late this year and early next year, in very thin markets, could mean something closer to 2.4500 will have to be factored in. Needless to say implied volatility should remain highish for quite some time.
EUR/GBP
Chart Levels: Support 0.6920..0.6894..0.6850..0.6800.
Resistance 0.7000..0.7015..0.7025..0.7040.
Still consolidating between the 0.7000 area and 0.6900, as expected, and we shall be looking for more signs of topping around 0.7000 this month. In what should still be a slow process we favour more cautious sideways work prior to a drop to 0.6850 probably very late this year. This should keep one-month at-the-money implied volatility below the 6.00% mark, considerably higher than last year’s low at 3.30%, and possibly dragging it back down to 4.50% very late this year. Note that the Euro is no longer overbought and that we are currently trading just over one standard deviation from the mean (0.6836) since April 2003. This has limited the range of EUR/GBP for most but not all of the time since then.
