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Weekly Technical Commentary

Tue, Oct 28 2008, 06:07 GMT
by Nicole Elliott

Mizuho Corporate Bank

USD/JPY

Chart Levels:

Support 91.88..90.87..89.20..87.75.

Resistance 95.00..97.00..101.00..103.00

The biggest weekly and monthly move in this currency pair since October 1998, again caused by de-leveraging; record one-month volatility at 38.90%. Surprisingly little said by Japanese authorities, in contrast to aggressive intervention in 2000/2001. Bearish momentum is stronger than anything since July 2002 as we approach the strongest ever level for the Yen against the dollar set in April 1995 at 79.70. Friday’s low at 90.87 is holding this morning but we would not pin too much hope on this continuing all week. Yen crosses, EUR/CHF, and all other variations of the ‘carry trade’ are in free-fall. Instruments that are liquid are being sold at any price, even quality things, to raise working capital and stave off bankruptcy.

EUR/USD

Chart Levels:

Support 1.2400..1.2335..1.2225..1.2100.

Resistance 1.2700..1.2940..1.3000..1.3370.

Trashed as firms repatriate anything they can liquidate and we worry about Eastern Europe sliding off a cliff. The long term implications for the Euro are unknown and serious, many relishing in the prospect of a possible end to the single currency. Giving up almost half the gains from the all-time low at 0.8228 in October 2000 to the all-time high at 1.6040 in July this year (hard to believe we have come this far in less than four months), suffering the biggest weekly, monthly and quarterly falls ever. The authorities silent and powerless to deal with the financial chaos they have aided and abetted. The taxpayer is rightly concerned for his and her future, whatever help this will give to exporters.

EUR/JPY

Chart Levels:

Support 113.62..112.00..111.30..110.00.

Resistance 119.50..122.00..125.00..131.50.

The Yen has gained against all currencies this year, a staggering 35.00% against the South African rand this month alone, 46.00% in 2008 versus the South Korean won, and to a record 55.11 to the Australian dollar. Against the Euro this month’s collapse has been even bigger than that of October 1998, a staggering 37 Yen so far and we still have another week to get through. Record one-month at-the-money implied volatility of 32.13% and record bearish momentum. The trade off this week will be the extent to which yet more ‘carry trade’ unwinding is needed versus an instrument that has become too expensive to touch. Desperate times mean terrible consequences. Never again will many be tempted to fund in ‘cheap’ Yen.

GBP/JPY

Chart Levels:

Support 140.00..139.00..134.65..131.00.

Resistance 150.00..155.00..160.00..165.00.

Possibly the biggest monthly move on record, 51 Yen and dropping below the 2000 low, a little shy of the all-time low at 128.20 set in April 1995. One-month at-the-money implied volatility has set a new record at 36.75% and it is more oversold than at any point in the last twenty years. It might be tempting to say, ‘enough is enough’ but record bearish momentum makes this a scary prospect. Over the coming month we feel this pair should try and stabilise and establish a new if wide trading band. The collapse of the last five quarters is similar in size and price levels to that of 1992, which then led to a sideways bend between 145.00 and 170.00 for another 15 months. Something similar is possible.

GBP/USD

Chart Levels:

Support 1.5260..1.5160..1.5000..1.4750.

Resistance 1.5875..1.6000..1.6500..1.7000.

Tumbling with the biggest two consecutive quarter loss since 1992, and on the Bank of England’s Trade Weighted basis to its weakest since October 1996. One-month at-the-money implied volatility reached a staggering 24.75% and still not a peep from the authorities. Cable is terribly oversold and GBP/CHF is almost at its record low of 1.7515. It is terribly oversold and moves of this magnitude are not sustainable, but would you run to the rescue? Doubtful so the slide will be allowed to run its course. Watch for possible signs of basing at the psychological 1.5000 area. Lows in 1996 and 1992 were around 1.4900; in 2001 1.3682 although it held over 1.4000 most of the time that year.

EUR/GBP

Chart Levels:

Support 0.7900..0.7800..0.7695..0.7555.

Resistance 0.8070..0.8100..0.8187..0.8197.

Shooting quickly back up towards 0.8200 as the authorities are accused of benign neglect. We remain under the equivalent all-time high of 0.8480 set in 1995. The pattern could still be a ‘broadening top’ with the latest rally the third attempt at the top of the pattern. So long as we do not get a weekly close clearly above 0.8200 we shall maintain this view, favouring an initial decline towards 0.7400 and then many sharp moves probably between 0.8000 and 0.7300. Note that other currencies have suffered a lot more this month, mainly emerging market ones, with the South African rand down 13.60% and the Australian dollar shrinking 10.70% versus Sterling. At-the-money implied volatility over 15.00% the highest in years.

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Published on  Tue, Oct 28 2008, 06:13 GMT