USD/JPY
Chart Levels: Support 110.00..109.00..108.00..107.00.
Resistance 112.00..113.40..114.00..115.05
Last week’s very big ‘bearish engulfing’ candle adds weight to our view that the next decent move will be south. The weekly close below 112.00 completes a very large ‘broadening top’ formation, a pattern that looks like a megaphone. A sustained break below the 2006 low at 109.00 should add considerable downside momentum, as would a monthly close below 110.00. Futures positions are still roughly half of what they were at June’s peak and will need rebuilding. If not this week, where cautious consolidation is likely (because the US dollar is oversold), then later this month we expect another sharp drop. We maintain or target at 105.00 long term. Note that we expect the Yen to do a lot better than other currencies.
EUR/USD
Chart Levels: Support 1.4577..1.4500..1.4450..1.4400.
Resistance 1.4680..1.4753..1.4800..1.4900.
The Euro set a new record high at 1.4753 Friday, ending the day with a ‘doji’ candle. This suggests correction and consolidation this week noting that so far we are holding above the nine-day moving average at 1.4577. It is not nearly 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. This month the Yen is expected to significantly outperform other currencies. The most vulnerable are those most closely associated with the ‘carry trade’. As this is unwound it will also affect other currency pairs.
EUR/JPY
Chart Levels: Support 161.00..160.50..159.00..158.00.
Resistance 162.40..163.35..164.20..165.00.
Looking increasingly top-heavy and we remind that 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. Last week’s ‘bearish engulfing’ candle and weekly close below 162.00 add weight to our view. A daily close below 160.50 should increase bearish momentum considerably. 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. At-the-money implied volatility should remain high.
GBP/JPY
Chart Levels: Support 228.35..227.00..225.75..224.80.
Resistance 231.00..233.00..236.00..240.00.
A huge ‘bearish engulfing’ candle last week adds weight to our view that we are forming 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 227.00, 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.
GBP/USD
Chart Levels: Support 2.0755..2.0650..2.0565..2.0400.
Resistance 2.0900..2.1010..2.1162..2.1250.
Having reached a multi-year high at 2.1162 the subsequent sharp sell-off and ‘bearish engulfing’ daily candle and ‘shooting star’ weekly candle suggest at least a week’s worth of correction and consolidation. Needless to say implied volatility should remain highish for quite some time, especially if we get, as we expect, sharp intra-day moves in a two-way street. A drop this week will probably be limited to the 2.0600 area. However, further out we shall allow for another leg down, to 2.0400 and maybe 2.0200. At the moment we feel that a drop below 2.0000 is unlikely, at least on a first attempt. Note that the pound should do better than many other currencies, the Czech koruna and Swiss franc the main exceptions.
EUR/GBP
Chart Levels: Support 0.6925..0.6894..0.6850..0.6800.
Resistance 0.7020..0.7045..0.7110..0.7120.
It comes as rather a shock to see the Euro trading up at 0.7045, the strongest it has been against the pound since January 2005 (that was when EUR/USD first traded above 1.3500). On closer inspection the break higher looks a lot less impressive, and a lot less frightening, than at first glance. Therefore we expect it to top around 0.7000, retreating very slowly over the next few weeks. This should keep one-month at-the-money implied volatility below the 7.00% mark, albeit considerably higher than last year’s low at 3.30%. Note that the Euro is slightly 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.
