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Weekly Technical Commentary

Mon, Dec 1 2008, 11:35 GMT
by Nicole Elliott

Mizuho Corporate Bank

USD/JPY

Chart Levels:

Support 93.93..93.53..92.48..91.88.

Resistance 96.00..97.44..98.70..99.50

Testing the lower edge of the ‘triangle’ though above November’s low at 93.53. Hopefully we will get a successful break this week and 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. As for rallies, these will now hopefully be capped by the large Ichimoku ‘cloud’. These are seen as good selling opportunities for a subsequent drop back down to 92.00 and eventually below this year’s low at 90.87. The question is whether we get to this point this month or whether we must wait until Q1 2009. If we drop below here this month, there is a chance that one-month implied volatility could trade over 38.00%.

EUR/USD

Chart Levels:

Support 1.2600..1.2400..1.2329..1.2225.

Resistance 1.2700..1.2860..1.29251.3100.

A small short squeeze but still holding very much within the neat range above October’s low at 1.2329, below retracement resistance. It should remain trapped here for another week but some time in December we might see a brief (and scary) ‘extension’ lower. The Euro is likely to continue to strengthen against a whole series of other European currencies. Before that though we may have to live through a series of ‘false breaks’ as the market continues to try and put in an interim base, something it has struggled to do for the last five weeks. One-month at-the-money implied volatility has eased from the record high at 28.50% yet at 21.00% it is still more double the long run mean of 9.75% (which should put off some speculators).

EUR/JPY

Chart Levels:

Support 118.00..116.45..114.45..113.62.

Resistance 123.45..126.25..127.25..128.45.

Consolidation since late October is getting a little boring. Hopefully this month things will get going again as we continue to favour another sell-off, a continuation of the unwinding of the ‘carry trade’. The move might get going in earnest by mid-December as the very large Ichimoku ‘cloud’ bears down on prices. In the meantime we still cannot rule out another (hopefully final) upside probe to the 126.00/127.00 area, something which is seen as a good selling opportunity. Note that all Yen crosses are doing something similar, with Yen strength across the board being the issue. Peripheral currencies and asset classes will be sold at any price in order to prop up core central businesses.

GBP/JPY

Chart Levels:

Support 139.00..137.65..134.50..132.60.

Resistance 147.00..148.50..150.00..153.75.

A right-angled ‘triangle’ formation below a massive Ichimoku ‘cloud’ mean it is just a matter of time before we break lower. November’s monthly close below 150.00 signals 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. As has been the case since July 2007, we feel that GBP/JPY is leading the way lower, the unwinding of the ‘carry trade’ coupled with the peculiarities of non-core currencies. Rate differentials will matter less as many countries consider zero interest rate policies.

GBP/USD

Chart Levels:

Support 1.5000..1.4700..1.4560..1.4470.

Resistance 1.5250..1.5535..1.5600..1.6000.

Still very unstable as we consolidate in a downward-sloping ‘wedge’ formation, a mirror image of the Dollar Index futures contract. This is seen as part of a long drawn-out process of forming an interim base. The monthly candle has an almost ten cent bounce from November’s low to the closing price, not a mean feat but still not enough to mark a low point. Possibly in holiday-thin markets this month we shall see an ‘extension’ below 1.4560, which might take one-month at-the-money implied volatility back up to this year’s high at 29.45%, in turn its highest in decades. Britain plc’s economic situation is probably not much worse nor any better than many countries; it’s problem is that it is not core G7.

EUR/GBP

Chart Levels:

Support 0.8300..0.8225..0.8175..0.8060.

Resistance 0.8435..0.8570..0.8675..0.8750.

November’s massive gyrations are not the norm for this currency pair so no wonder one-month at-the-money implied volatility remains close to record high (23.90%). We continue to work in 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. Therefore plan for extreme volatility and price long-dated options accordingly. Note that while serious, it is not only the pound that has been singled out. Eastern European and some Scandinavian currencies have also been hard hit as money is moved out of ‘riskier’ assets to prop up rotting core business arms.

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Published on  Mon, Dec 1 2008, 11:44 GMT