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Weekly Technical Commentary

Mon, Sep 8 2008, 13:32 GMT
by Nicole Elliott

Mizuho Corporate Bank

USD/JPY

Chart Levels:

Support 108.00..107.20..106.40..105.50.

Resistance 109.19..110.67..111.00..111.80

Once again the Ichimoku ‘cloud’ has done a splendid job in limiting sudden collapses. Because it is getting fatter over the coming month, and because the US dollar is fractionally oversold, we feel it should consolidate above 107.00 for another week or two. However, if at-the-money implied volatility remains high, we could find that ranges are riddled with ‘spikes’ and ‘extensions’ making it very hard to decide where to put orders. Daily and weekly closes below 108.00 should add some bearish pressure, 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. Note that all Yen crosses will be subject to similar problems.

EUR/USD

Chart Levels:

Support 1.4200..1.4165..1.4125..1.4015.

Resistance 1.4430..1.4545..1.4700..1.4815.

A pathetic attempt at basing against trendline and retracement support. In what is expected to be a slow process (note that we also based around here in Dec07/Jan08) nerves of steel will be required. The dramatic collapse of the last five weeks has taken us very much by surprise and has postponed the rally that we had targeted for late this year. Hopefully a thickening Ichimoku weekly ‘cloud’ coupled with the fact the Euro is still so very oversold should help it find its feet. The sudden alleged global embracing of the greenback looks suspect and price moves are probably caused by a massive clearout of stale positions rather than new ones being built. We urge extreme caution.

EUR/JPY

Chart Levels:

Support 153.60..152.00..150.60..150.00.

Resistance 157.00..158.00..160.00..163.15.

Tremendous moves as many belatedly pick up worrying signals in their radars; about timetoo! The bounce from Friday’s low at 150.50, and pivotal chart area, is very dramatic but nevertheless just a bounce. One-month at-the-money implied volatility exploded, as expected, and should stay relatively high all month. Only a weekly close below 152.00 completes a very major super-long term ‘rounded/triple top’ that started early 2007. We expect this some time this month, therefore all rallies are seen as good long term selling opportunities for more dramatic declines later this year. We urge readers to look at what happened to Yen crosses in 1997 and 1998 as that is the sort of thing we feel is due imminently.

GBP/JPY

Chart Levels:

Support 190.00..187.50..186.00..185.00.

Resistance 194.00..195.65..200.00..205.00.

Leading the way lower, dipping below March’s low at 192.50, but recovering somewhat late Friday. While the bounce was impressive, the weekly close at the lowest price since July 2005 should make many sit up and listen. We shall allow for a little consolidation at this point, allowing other Yen crosses to catch up a bit. One-month at-the-money implied volatility burst higher on these very sharp moves, as expected, but should subside towards 14.00% over the next week or two. 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.

GBP/USD

Chart Levels:

Support 1.7565..1.75355..1.7400..1.7000.

Resistance 1.7800..1.8000..1.8200..1.8400.

A complete disaster and the authorities look on and do nothing. Maybe that is for the best as when they do something it is an embarrassing tinkering around the edges at best, and at worst more digging at the graveside. We, possibly alone among analysts, not only feel the move is overdone but that US dollar strength is not something which will carry on for the rest of this year. The move though has forced us to postpone further dollar declines that we now expect in the middle of next year. Therefore we continue to wait until Cable bases before moving higher later this quarter. Today’s half-hearted attempt at a rally is very disappointing, especially as Cable is more oversold than anything seen since late 1982.

EUR/GBP

Chart Levels:

Support 0.8000..0.7965..0.7850..0.7745.

Resistance 0.8100..0.8187..0.8255..0.8400.

Last week’s small ‘spike high’ at a new all-time high for the Euro against the pound at £0.8187 suggests we will hold below here for another week or three. Having moved on to ‘Plan B’ last week we shall continue 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 below 0.8100, dipping to 0.7965 and 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  Mon, Sep 8 2008, 13:44 GMT