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Weekly Technical Commentary

Tue, Nov 11 2008, 05:59 GMT
by Nicole Elliott

Mizuho Corporate Bank

USD/JPY

Chart Levels:

Support 97.90..96.75..95.95..94.25.

Resistance 99.79..100.56..101.55..102.15

Little to add as we continue in correction and consolidation mode, here and in all variants of the ‘carry trade’. This may continue for another week and possibly for most of November. However, we warn against complacency because we feel there is another downside move due by the end of this year. As for rallies, these ought to be capped between 102.00 and 103.00 and are seen as good selling opportunities for a subsequent drop back down to 95.00 and eventually below this year’s low at 90.87. This should keep one-month at-the-money implied volatility below October’s record high of 43.50%, probably swinging between 15.00% and 25.00% for much of the coming month.

EUR/USD

Chart Levels:

Support 1.2650..1.2525..1.2329..1.2225.

Resistance 1.3000..1.3300..1.3400..1.3600.

Consolidating in a ‘triangle’ above the recent low at 1.2329 and should try to hold above here again this week. We expect a slow rally back up to 1.3300 and then through here to the 1.3600 area where more serious consolidation should take place. One-month at-the-money implied volatility has eased from the record high at 28.50% yet at 20.00% it is still more than double the long run mean of 9.75%. The Euro is less oversold and bearish momentum has eased considerably. We favour more subdued trading in November but warn that financial conditions might deteriorate very dramatically through the year-end. If this is the case unwinding of the ‘carry trade’, and a flight into Yen and US dollars, should resume.

EUR/JPY

Chart Levels:

Support 124.65..122.00..116.00..113.62.

Resistance 128.50..131.05..135.00..138.50.

Consolidating in a neat little band well above October’s low at 113.62 and should hold above the 114.00 area all month. Rallies are corrective in nature and we favour more declines over the next year or more. In other words, the long term trend is for yet more Yen strength despite the massive moves of the last three months. These ought to be a lot slower and steadier, but be careful at year-end when the desperate may have to slash and burn positions again to raise money to square up books if their financial year-end happens to be the 31st December. At the moment we favour a squeeze through the recent high at 131.05 to the 136.00 area and possibly all the way up to 140.00 if enough bullish momentum builds.

GBP/JPY

Chart Levels:

Support 155.00..150.25..148.85..142.80.

Resistance 160.00..162.30..165.00..175.00.

Working in a ‘flag’ formation well above October’s low at 139.00. Because of the size of recent moves, both down and now up, one-month at-the-money implied volatility remains high at 33.65%, well above the long-run average at 10.80%. We shall continue to favour a squeeze through the recent high at 165.00 to 175.00 and probably no higher than 179.00. A monthly close below 150.00 forces us to review, signalling a renewed downside attack which should take us down to the 1995 all-time low at 128.20, possibly even further, in what would then be catastrophic financial conditions. In this case volatility here, and in a whole raft of other instruments as well as currencies, might hit new record highs.

GBP/USD

Chart Levels:

Support 1.5600..1.5535..1.5260..1.5160.

Resistance 1.6200..1.6400..1.6655..1.7000.

On the Bank of England’s Trade Weighted Index sterling is at its weakest since September 1996 while Cable consolidates in a ‘triangle’ barely above this year’s low at 1.5260. One-month at-the-money implied volatility at 22.00% is only just below last week’s staggering peak at 29.45%. Cable is somewhat oversold and bearish momentum is still incredibly strong. We shall allow for a squeeze up to 1.6400 this week, possibly 1.7000 where many will start panicking, followed by a series of sudden random fairly big swings between roughly 1.5600 and 1.7000 until month-end. A weekly close above 1.7500 would ease downside pressure considerably but only above October’s high at 1.7878 does the outlook for Cable improve significantly.

EUR/GBP

Chart Levels:

Support 0.8000..0.7900..0.7800..0.7695.

Resistance 0.8204..0.8240..0.8300..0.8365.

The chattering classes are talking of parity as we probe the upper edge of a potential ‘broadening top’ formation. The very big Ichimoku weekly ‘cloud’ has helped move it up here over the last three weeks and it may limit the downside well into Q2 2009. This type of price action is typical of a market looking for direction which explains why one-month at-the-money implied volatility remains so high at 16.25%. So long as we do not get a weekly close clearly above 0.8200 we shall continue to watch for signs of topping. If we break above 0.8200 we would be forced to move into Plan C, with massive swings roughly between 0.7800 and 0.8500 for the next six months at least, possibly a whole year.

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Published on  Tue, Nov 11 2008, 06:04 GMT