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Weekly Technical Commentary

Mon, Oct 6 2008, 12:29 GMT
by Nicole Elliott

Mizuho Corporate Bank

USD/JPY

Chart Levels:

Support 102.50..101.45..100.00..98.00.

Resistance 104.00..105.15..106.00..107.15

The Yen, and Japan plc generally, are seen as a safe-haven in the gathering storm. Counterparty risk is key as we become ever more reluctant to do any type of business with anybody. Wider bid-offer spreads and implied volatility close to record highs make doing business more expensive and difficult. The disjointed and slow response by the authorities is adding to woes. The implosion of leverage has further to go, desperate repatriation and reversion to core markets the symptoms, and unfortunately there is precious little money available outside the immediate banking system. This is likely to get worse, not better. Buy Yen and Yen crosses.

EUR/USD

Chart Levels:

Support 1.3540..1.3450..1.3360..1.3265.

Resistance 1.3700..1.3800..1.3915..1.4040.

We have completely underestimated the need for US banks and funds to repatriate all forms of non-dollar holdings to shore up creaking edifices at home. Adding to the woe is the realisation of Eurozone citizens that their financial institutions are not immune to the global meltdown. One wonders where they will choose to squirrel away their savings. In the meantime one-month at-the-money implied volatility is at a record 17.75% and the Euro has lost 15 cents in twelve weeks. Ouch! We expect this clear-out, which takes the shape of an A, B, C-type formation, to end imminently between 1.3550 and 1.3360. Allow for an ‘extension’, here and in many other instruments, as chaos reigns.

EUR/JPY

Chart Levels:

Support 140.00..139.00..137.00..135.00.

Resistance 142.00..144.50..146.00..150.50.

Yen crosses are (mercifully) going to plan, breaking pivotal long term support. The South Korean won continues to lead the way, closely followed by AUD/JPY and NZD/JPY. This is another version of the unwinding of ‘carry trades’ and also possibly a flight to relative safety seeing as Japan had its banking crisis some years ago (and lived to tell the tale). Over the next few months we expect EUR/JPY to drop to the 130.00 area, in an out and out rout, so that one-month at-the-money implied volatility could match its 1999 record of 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 180.75..180.00..179.00..176.75.

Resistance 186.00..190.00..195.00..197.50.

Trading down even faster than we had imagined as all Yen crosses are hit hard. Now worth just over 180.00 Yen per pound, the cross is at its lowest since November 2003. One-month at-the-money implied volatility has matched its 1998 peak at 24.00%. We feel the move should slow a little here at the 180.00 area, allowing other Yen crosses to catch up. 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 KRW/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 1.7500..1.7445..1.7200..1.7000.

Resistance 1.7600..1.7700..1.8000..1.8100.

Holding up better than many, admittedly after one of the biggest quarterly sell-offs in history, as we re-assess Sterling’s vulnerability to the financial sector and the risk of moral hazard generally. One-month at-the-money implied volatility at 19.00% is at its highest in at least sixteen years and futures open interest is running at about half of last year’s peak. Extreme caution is warranted here, and in all financial markets, as moves will be vicious when the ‘price’ is not the issue but the need to ‘get out’ is all-important. The pound is not as oversold as some might think and bearish momentum has halved since mid-September. Watch for cautious basing activity this week and over the coming month.

EUR/GBP

Chart Levels:

Support 0.7700..0.7650..0.7595..0.7555.

Resistance 0.7760..0.7800..0.7900..0.8025.

Dropping to £0.7700, the pound’s strongest against the Euro since mid-March, as investors re-think the dangers of the credit crisis in Britain and abroad. The all-time high at £0.8187 looks like some sort of ‘false break’ or ‘spike high’ and on the Bank of England’s Trade Weighted Index the pound is trying to recover too, gaining against Scandinavian and Eastern European currencies. One-month at-the-money has leapt to 11.00%, still a way below the 2000 peak at 14.00%. This week it should hold below 0.7900, maybe even 0.7800, drifting to 0.7650 and maybe 0.7600 within the next week or so. Long term we favour many large swings roughly between 0.8100 and 0.7300.

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Published on  Mon, Oct 6 2008, 12:35 GMT