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Weekly Technical Commentary

Mon, Sep 29 2008, 10:48 GMT
by Nicole Elliott

Mizuho Corporate Bank

USD/JPY

Chart Levels:

Support 105.50..105.00..104.50..103.50.

Resistance 106.50..107.00..107.75..108.60

The finance industry is the eye of the storm, making front page news as one after another institutions fail or are rumoured to be failing. This morning we have not had even the tiniest relief rally as US politicians plan a $700B rescue package. Instead sellers are out in force, taking stock indices down to recent lows, and interbank money is non-existent as Q3 ends. Bid/offer spreads in all instruments are very much wider than they should be as we become more reluctant to do any type of business with any counterparty. The Yen maintains its safe-haven status, this aspect increasing in importance as the downward spiral exerts ever greater force on an ever wider set of participants. The authorities’ paralysis most unhelpful.

EUR/USD

Chart Levels:

Support 1.4300..1.4250..1.4150..1.4070.

Resistance 1.4560..1.4600..1.4765..1.4900.

A ‘spike high’ last week after the massive ‘spike low’ two weeks ago suggest this market is looking for direction in increasingly stressed conditions. Over the next month or so we still favour several sharp moves roughly between 1.4200 and 1.4900, keeping one-month at-the-money implied volatility capped around 15.00%. The Euro should continue to lag Eastern European currencies but gain over Scandinavian ones. It is currently oversold against the US dollar but a bout of consolidation should sort this out. We expect sharp intra-day moves as liquidity dries up and spreads get ever wider as participants become increasingly reluctant to deal with an ever wider range of investors.

EUR/JPY

Chart Levels:

Support 152.00..150.75..149.00..147.00.

Resistance 154.00..155.20..156.30..157.00.

Yen crosses should drop again to re-test pivotal long term support, if not this week then within the next month. The South Korean won is leading the way at the moment, dropping to a multi-year low against the Yen this morning. Over the next few months we expect EUR/JPY to drop to the 130.00 area, in what will hopefully be a steady trend rather than an out and out rout. If the latter were to be the case, one-month at-the-money implied volatility could match its 1999 record 20.00% (and three-month’s at 23.00%). This is seen as just the first leg in a series of moves lower, a new long term trend of Yen strength against other majors, erasing much of the rally from 2000.

GBP/JPY

Chart Levels:

Support 190.00..186.75..186.00..184.40.

Resistance 195.65..197.45..200.00..205.00.

Turning down from retracement resistance well ahead of the Ichimoku ‘cloud’ as investors re-think Japan’s economy and its financial system. Having suffered its own asset bubble, burst, and banking crisis several years ago lessons might be learnt. A sustained break below 186.00 next month confirms that the ultra-long term trend is to a stronger Yen. Our medium term target remains at 175.00 with a good chance of an ‘extension’ to 165.00 before some semblance of order returns. Charts with patterns similar to this one are AUD/JPY, NOK/JPY and NZD/JPY. Note that the bulk of these moves ought to be due to Yen strength rather than catastrophic weakness of other major currencies.

GBP/USD

Chart Levels:

Support 1.7900..1.7800..1.7500..1.7445.

Resistance 1.8200..1.8340..1.8672..1.8800.

A ‘spike high’ on the chart last week against the 9-week moving average and ahead of 38% retracement resistance from last year’s multi-year high. This suggests another week or three of fairly vicious price moves as Cable, and other currencies, look for direction. On the monthly candle we have on of the most massive ‘doji’ patterns ever, with a low at 1.7445 and a high of 1.8672, and a potentially tiny little ‘body’ between 1.8190 and tomorrow’s closing price. Watch also the quarterly charts tomorrow for further signs that the sell off since July is an aberration. One-month at-the-money implied volatility has retreated from a high at 13.00%, close to the 1995 peak of 13.80%, and should hold below here for a bit longer.

EUR/GBP

Chart Levels:

Support 0.7900..0.7850..0.7800..0.7745.

Resistance 0.8000..0.8050..0.8100..0.8187.

An oasis of relative calm as storms rage in many financial instruments, holding inside the range that has prevailed for most of the last five months. The monthly and quarterly candles, to be scrutinised Wednesday, add weight to our view that the all-time high at £0.8187 looks like some sort of ‘false break’ or ‘spike high’. 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 trying to recover too, gaining against Scandinavian and Eastern European currencies but lagging the Canadian dollar. This week it should hold below 0.8020, dipping to 0.7850 within the next few weeks.

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Published on  Mon, Sep 29 2008, 10:55 GMT