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Weekly Technical Commentary

Tue, Sep 2 2008, 08:22 GMT
by Nicole Elliott

Mizuho Corporate Bank

USD/JPY

Chart Levels:

Support 107.20..106.40..105.75..105.00.

Resistance 109.90..110.67..111.00..111.80

August’s candle is an ‘evening/shooting star’ with the move above 110.00, an important long term pivotal area, being an ‘extension’. Over the next month or three we expect the Yen to gain against the US dollar, and for the Yen to gain against most if not all major currencies. Whether this is because of unwinding of the carry trade, or whether it is a flight to safety, we feel that the Swiss franc should do something similar and gain against the Euro. Daily and weekly closes below 108.00 should add a little bearish momentum, while a break below 105.00 may send many into a flap as they are forced to deal with a complex, multi-layered FX situation. One-month at-the-money implied volatility should move up to 13.50%.

EUR/USD

Chart Levels:

Support 1.4600..1.4570..1.4525..1.4440.

Resistance 1.4800..1.4909..1.5000..1.5100.

Hovering above the recent low at 1.4570 for a second week in a row and well within normal long term retracement parameters. Therefore we continue to wait and watch for reversal patterns here and in a series of other major currencies. Hopefully a thickening Ichimoku weekly ‘cloud’ coupled with the fact the Euro is still so very oversold should help. As and when we start inching higher one-month at-the-money implied volatility should move in tandem towards 12.00%. On the ECB’s effective exchange rate the Euro has actually strengthened since Wednesday as other currencies (mainly Sterling and the South Korean won) have weakened dramatically.

EUR/JPY

Chart Levels:

Support 157.62..157.00..156.00..154.00.

Resistance 159.62..161.00..163.11..164.00.

Our patience has paid off and Yen crosses are at last moving lower as expected. Those closest to March’s lows are GBP/JPY, KRW/JPY and NZD/JPY. This EUR/JPY has today broken below a thin Ichimoku ‘cloud’ which, coupled with the weekly close below 160.00, should send it hurtling a lot lower this month. There is a chance of a fall to 152.00 within the next two weeks, even though the Euro is already oversold. One-month at-the-money implied volatility exploded up to 12.00% and should continue up to 14.00% early this month. Only a weekly close below 152.00 completes a very major super-long term ‘rounded top’ that started early 2007 following a rally which started late in 2000.

GBP/JPY

Chart Levels:

Support 194.00..192.50..190.00..185.00.

Resistance 197.00..200.00..205.00..207.50.

Collapsing for a sixth week in a row, rapidly closing in on March’s low at 192.50. Long term bearish pressure should increase with the monthly close below 198.00, so we expect a drop to 190.00 imminently. At this point GBP/JPY may consolidate a little allowing other Yen crosses to catch up a bit. One-month at-the-money implied volatility rallied to 13.00% recently and should move a lot higher this next month, say to 15.00%. A sustained break below 190.00 confirms that the new ultra-long term trend is to a stronger Yen against the pound, and who cares whether this is because of unwinding of the carry trade or for any other of a myriad different reasons. Moves are likely to be fast and furious, taking no prisoners.

GBP/USD

Chart Levels:

Support 1.8000..1.7925..1.7800..1.7750.

Resistance 1.8300..1.8500..1.8800..1.9000.

The biggest monthly collapse since ejection from the ERM in 1992 (when Mr. Soros took on the Bank of England, and won). The move is much faster and bigger than that seen in 2005 (when Cable dropped from 1.9550 to 1.7000) and saying it is oversold must surely be the understatement of the year. No wonder one-month at-the-money implied volatility has picked up to 10.70% and should peak around here shortly. We, possibly alone among analysts and UK authorities, not only feel the move is overdone but that US dollar strength is not something which will carry on this year. Therefore we continue to wait until Cable bases before moving higher later this quarter.

EUR/GBP

Chart Levels:

Support 0.8000..0.7845..0.7800..0.7745.

Resistance 0.8139..0.8200..0.8255..0.8400.

A new all-time high for the Euro against the pound at £0.8139. This has forced us to change our medium and long term view, forcing us to move on to ‘Plan B’. We shall now have to allow for up to a year’s worth of sideways trading in a much broader band than that of Q2 2008. On the Bank of England’s Trade Weighted Index the pound is at its weakest since November 1996, when its weakest ever on this basis was February 1996. This week it should hold above 0.8000, nudging up very slowly to test 0.8200 and maybe 0.8255 later this month. Stabilising here before dropping towards 0.7800 next month. Then sideways in a very broad band of at least five pence, potentially with ‘spikes’ up to ten pence wide.

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Published on  Tue, Sep 2 2008, 09:00 GMT