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Weekly Technical Commentary

Mon, Nov 17 2008, 11:14 GMT
by Nicole Elliott

Mizuho Corporate Bank

USD/JPY

Chart Levels:

Support 95.87..94.48..92.48..91.88.

Resistance 98.45..99.79..100.56..101.55

Still in a holding pattern, ‘triangle’ consolidation below retracement resistance. We continue to feel there is another downside move due by the end of this year as the ‘carry trade’ unwinds further and the credit crunch affects more areas of business and daily life. As for rallies, these ought to be capped between 99.00 and 101.00, although a brief but dramatic squeeze to 103.00 cannot be ruled out just yet. These 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 20.00% and 32.00% for another few weeks before dropping at year-end.

EUR/USD

Chart Levels:

Support 1.2500..1.2400..1.2329..1.2225.

Resistance 1.2860..1.3000..1.3120..1.3300.

Clinging to the lower edge of the ‘triangle’ above October’s low at 1.2329. We expect a slow rally back up to 1.3000 and then through here to the 1.3300 area where more consolidation should take place. One-month at-the-money implied volatility has eased from the record high at 28.50% yet at 22.00% it is still more than double the long run mean of 9.75% (which should put off some speculators). The Euro is still oversold and bearish momentum has eased from October’s record. We favour more subdued trading in November but warn that financial conditions might deteriorate very dramatically before year-end. We warn against complacency and potential ‘false breaks’.

EUR/JPY

Chart Levels:

Support 120.00..117.65..116.00..113.62.

Resistance 126.00..128.50..131.05..135.00.

Like dollar/Yen and Euro/dollar, this currency pair is holding in a consolidation pattern after plummeting like a stone the previous three months. While very dramatic, this was the start and not the end of the reversal of the rally that originally started late in 2000. Therefore the long term trend is for yet more Yen strength against a whole raft of other currencies. Moves should 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. We shall continue to allow for a re-test of the recent high at 131.05 and cannot rule out a brief but surprising (to many) squeeze towards the 135.00 area. This is seen as a good selling opportunity.

GBP/JPY

Chart Levels:

Support 140.00..139.00..138.00..134.50.

Resistance 150.00..157.50..165.00..175.00.

Hard to believe but Sterling has lost 53.5% of its value against the Yen so far this year, 33.0% against the US dollar, and not a peep from the authorities up until this weekend (warning that a run on the currency was a possibility some time in the future!) Last week’s dip below October’s low at 139.00 to 138.85 looks like a step too far and the cross should hold above here this week and probably until month-end. A monthly close below 150.00 should signal 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 and currencies, might hit new record highs.

GBP/USD

Chart Levels:

Support 1.4645..1.4560..1.4470..1.4340.

Resistance 1.5000..1.5260..1.6000..1.6675.

Record bearish momentum, record one-month at-the-money implied volatility at 29.45%, a record quarterly drop (and we still have over a month to go!)…and the authorities continue to look the other way. ‘Benign neglect’ on an unprecedented scale and still very oversold. This year Sterling has weakened against all major currencies except the South African rand and South Korean won (and even then only just). On the Bank of England’s trade weighted basis it has matched it all-time weakest of November 1995 with an astonishing 10% decline on this index so far this month. Moves on this scale will go a long way to shrinking debt and robbing savings. Who do they think they are kidding?

EUR/GBP

Chart Levels:

Support 0.8475..0.8300..0.8200..0.8050.

Resistance 0.8565..0.8675..0.8750..0.9000.

The very thick Ichimoku weekly ‘cloud’ we had warned of helped propel the Euro to a record high against the pound at 0.8675. This has seen one-month at-the-money implied volatility set a new record high at 23.90%, over three times the mean at 7.00%, and double the two-standard deviation point of 11.50%. These sort of moves are more usually associated with banana republics and not a G7 country, let alone one who’s PM thinks he can lead the way out of the economic mire. We have been forced to move onto Plan C, where we shall allow for massive swings roughly between 0.7800 and 0.9000 (equivalent to the all-time low GBP/DEM at 2.1750 of May 1995) for the next six months at least, possibly a whole year.

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Published on  Mon, Nov 17 2008, 11:21 GMT