USD/JPY
Chart Levels: Support 108.00..107.55..107.00..106.50.
Resistance 109.00..110.00..111.00..112.00
Last week’s close was the lowest in many, many months and hints that we will get a monthly close below 110.00 this Friday. Bearish momentum is stronger than it has been since May 2006 and the US dollar is surprisingly not oversold. Futures positions continue to be trimmed as we approach December delivery. We maintain our target at 105.00 long term. Note that we expect the Yen to do a lot better than other currencies and may have to revise down our targets for USD/JPY. We remind that thin year-end markets combined with a chronically weak US dollar mean implied volatility should remain high and price moves may be extreme and reverse suddenly.
EUR/USD
Chart Levels: Support 1.4775..1.4600..1.4521..1.4500.
Resistance 1.4875..1.4968..1.5000..1.5250.
The very strong rally since August looks as though it could do with a period of correction and consolidation. A pullback to the 1.4400 area is seen as a good medium term buying opportunity for renewed US dollar weakness next year. On the ECB’s effective exchange rate at 111.84, the Euro is at its highest ever, gaining against Sterling and Eastern European currencies this month. Note that so many have missed the bulk of the Euro’s rally, having just woken up to the chronic state of the US dollar, that there is likely to be an awful lot of pent up demand to diversify out of what has been considered until now the world’s reserve currency of choice.
EUR/JPY
Chart Levels: Support 160.50..160.00..159.00..158.00.
Resistance 163.41..163.75..164.31..165.00.
At first glance the chart looks pretty much as it did last week. But note that Friday’s close was the lowest in many weeks and July’s close below 162.00 led to a massive sell-off. Downside momentum is currently at its strongest since then. We continue to feel we are in the process of building a very large and important long term top where a weekly close below 154.00 completes the ‘head-and-shoulders’ pattern. Until then allow for a series of random moves roughly between 159.00 and 164.00. Rallies are seen a good medium and long term selling opportunities. Note that at-the-money implied volatility has drifted from near record highs and is expected to swing between 11.50% and 16.50% for the next month or two.
GBP/JPY
Chart Levels: Support 222.00..221.00..220.00..219.25.
Resistance 228.40..232.00..233.00..236.00.
This Yen cross is leading the way lower as Sterling takes a hammering against the strongest currencies this month. We have formed a massive ‘head-and-shoulders’ top. Last week’s close below the ‘neckline’ at 227.00, and below the bottom of the Ichimoku ‘cloud’ means downside momentum is at its strongest in years. This should send this pair tumbling to 220.00 short term and 200.00 medium term. Below 190.00 on a first attempt is considered unlikely. Something similar happened in September 1998 when GBP/JPY dropped from 232.00 to 193.00 within a month. One-month at-the-money implied volatility is still not as high as it was then, so is likely to rocket higher if we get the huge moves we expect.
GBP/USD
Chart Levels: Support 2.0500..2.0350..2.0200..2.0000.
Resistance 2.0765..2.0845..2.0925..2.1162.
Consolidating under this year’s high at 2.1162, as expected, and likely to do so again for another week or two. Medium term we shall allow for another downside probe to 2.0400, probably 2.0200, but a sustained break below 2.0000 is unlikely. However, even if we do drop below there it does not alter our medium and long term view. For next year we continue to favour prolonged US dollar weakness. The only question is the speed of the moves, here and in a whole raft of other currencies. Open interest is declining as we approach December delivery so these positions will have to be re-built. The problem is that thin year-end markets may be unduly influenced by this renewed buying pressure.
EUR/GBP
Chart Levels: Support 0.7120..0.7080..0.7000..0.6900.
Resistance 0.7216..0.7225..0.7265..0.7300.
The highest price since 2003 and we have stalled just ahead of very important resistance at 0.7225. The Euro is still horribly overbought against sterling and Bullish momentum is at its strongest in two years. One-month at-the-money implied volatility has rocketed to the highest level since the summer of 2003 and is likely to stall in the 9.00% area. Wait and watch for signs of a dramatic reversal. In the unlikely event that we do move and hold above 0.7300 the consequences for the currency, and the country in general, are enormous. No point ignoring facts but the relationship with Eurozone countries would suffer extreme pressure and a move to 0.8000, maybe the 1996 equivalent 0.8480, are possible.
