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Weekly Technical Commentary

Tue, Oct 21 2008, 06:06 GMT
by Nicole Elliott

Mizuho Corporate Bank

USD/JPY

Chart Levels:

Support 100.60..99.25..98.60..95.77.

Resistance 102.50..103.30..104.50..105.00

Price action last week is seen as consolidation at some of the lowest levels this year, below the fairly pivotal 102.50 area, as we get to grips with the rather scary concept of the US dollar being worth less than 100 Yen. This process should continue this week, maybe until the end of this month, prior to a re-test of March’s low at 95.77. Therefore rallies to 103.00/104.50 are seen as selling opportunities. This is part of a global move to unwind ‘leverage’ in all its many guises, and where some companies are forced to sell the ‘family silver’ in order to stave off immediate bankruptcy. There is more to come so we continue to see Japan plc as a relative ‘safe haven’ in a sea of chaos.

EUR/USD

Chart Levels:

Support 1.3400..1.3345..1.3255..1.3100.

Resistance 1.3600..1.3800..1.3915..1.4040.

We completely underestimated the need for US banks, funds and corporates to re-capitalise and repatriate all forms of non-dollar holdings to shore up creaking edifices at home. Adding to the woe is the realisation by Eurozone citizens that their financial institutions are not immune to the global meltdown and are perhaps more vulnerable than UK ones because of the many central banks involved. The Euro, having given up 61% of the gains versus the USD since late 2005, 50% on the ECB’s Effective Exchange Rate, we still feel it should try and base at current levels. Attempts so far have been a joke. Let’s see if it can try a bit harder this week and between now and month-end.

EUR/JPY

Chart Levels:

Support 136.00..134.75..134.00..132.15.

Resistance 138.50..139.70..141.00..141.75.

While lower than last week’s record 28.00%, one-month at-the-money implied volatility at 23.25% remains very high indeed. Last week the cross consolidated in a ‘triangle’ continuation pattern, which could also be seen as an inverted ‘pennant’. The terribly oversold condition has eased a little while keeping bearish pressure very strong indeed. This should allow traders and investors to get used to these new lower levels, having already given up almost 50% of the rally since 2001. We are in a new long term trend of Yen strength against other majors, one by one they should move lower and drag each other down. Note that some Yen crosses are already trading at extreme levels, KRW/JPY at its lowest since the 1998/1999 Asia crisis.

GBP/JPY

Chart Levels:

Support 175.25..173.00..168.60..165.95.

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

Consolidating above this month’s low at 165.95 and should continue to do so for another week or three. Rallies so far have held well below the fairly pivotal 190.00 so that the move lower is formed of large steps down. Corrective bounces shop stop short of the 26-day average at 191.00 and are seen as selling opportunities for another step down later this quarter. One-month at-the-money implied volatility has retreated considerably from a record 33.25% and should hold below here for quite some time. Our medium term target of an ‘extension’ to 165.00 has been met so GBP/JPY should drop by less than some other currencies. Those with the highest interest rate differentials are the ones likely to see the biggest losses.

GBP/USD

Chart Levels:

Support 1.7300..1.7135..1.7065..1.6781.

Resistance 1.7520..1.7660..1.7840..1.7975.

One-month at-the-money implied volatility at 16.00% is admittedly a lot lower than the 21.12% peak last week, but remains terribly high as compared to the last 20 years. This is not ‘normality’ returning, just a breather in among the chaos. Having clawed its way up from a low at 1.6781 Cable is not as oversold as some might think and bearish momentum is lower than it has been since mid-August. Watch for cautious basing activity this week maintaining very cautious trading strategies for at least another two weeks. Investors have realised that the UK is not the only place with a ropey finance industry so Sterling has begun to claw back the one-off loss suffered from July last year. This trend should continue.

EUR/GBP

Chart Levels:

Support 0.7690..0.7650..0.7595..0.7555.

Resistance 0.7795..0.7860..0.7900..0.8025.

One-month at-the-money implied volatility hit 13.55%, just below the 2000 peak at 14.00%. It is expected to swing sharply between 12.50% and 8.50% until year-end. Today the pound dipped below £0.7700 to the Euro, its strongest since March, and looks as though further moves down might be hampered by a very thick Ichimoku ‘cloud’. Long term we favour many large swings roughly between 0.8000 and 0.7300, with swings being limited to trading inside the Ichimoku ‘cloud’ most but not all of the time. Very much a trader’s market. On the Bank of England’s Index while regaining composure, it still has a bit more to do before we can see our way out of the woods.

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Published on  Tue, Oct 21 2008, 06:14 GMT