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Weekly Technical Commentary

Mon, Feb 16 2009, 10:27 GMT
by Nicole Elliott

Mizuho Corporate Bank  |  View company's profile

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USD/JPY

Chart Levels:

Support 89.70..88.50..88.00..87.10.

Resistance 92.50..93.10..94.65..95.65

Consensus opinion for a stronger Yen, coupled with a North American holiday today, might mean that we manage a squeeze above trendline resistance in thin markets later on. This may rattle some, setting off buy stops, and allowing prices to extend their rally. We continue to allow for a lot of messy broadly sideways work, with an initial squeeze towards 94.00 later this month. Note that a brief squeeze to 98.00 some time in H1 2009 cannot be ruled out. While this takes place the tendency will be for the Yen to loose ground against a host of other major currencies, taking Yen crosses higher, probably to the surprise of many who are still calling for de-leveraging to cause a stronger Yen.

EUR/USD

Chart Levels:

Support 1.2700..1.2650..1.2500..1.2550.

Resistance 1.3000..1.3100..1.3200..1.3400.

Terribly slow work as the Euro continues to try and base around 1.2800 inside a downward-sloping ‘wedge’ formation - a difficult reversal pattern. Expect more of the same this week, potentially with a ‘spike low’ in holiday-thin conditions late today. A sustained break above the top of this, around 1.3100, would add some much-needed weight to our argument. This would mean that the Euro may catch up a little with what Cable has already done and would help lift Yen crosses too. One-month at-the-money implied volatility remains relatively high at 18.50% and will probably trade around 20.00% for another month. In fact FX volatility is likely to remain relatively high in many currencies for another three months.

EUR/JPY

Chart Levels:

Support 116.50..114.00..113.60..112.00.

Resistance 120.30..121.00..122.35..125.00

Little to add as prices consolidate above the lower edge of the band that has been in place since October, in turn the lowest level since 2002. The latest bounce has once again been limited by the 26-day average but as the 9-day one looks set to cross above this one we feel that a squeeze higher is imminent. Later this month we expect it to move to new recent highs, noting that the Ichimoku ‘cloud’ is now very thin. A break above the mid-point of the range since October, roughly at 122.35 might prove difficult this week, but this should see some short-covering taking up back up towards 130.00. Consensus opinion is not this way round and is likely to find many once again incorrectly positioned.

GBP/JPY

Chart Levels:

Support 128.80..127.00..125.25..119.00.

Resistance 134.00..135.15..136.00..137.35.

Leading the way, consolidating under a large Ichimoku ‘cloud’ which gets considerably thinner at the end of this month. Therefore this week we shall allow for more consolidation at these slightly higher levels, above the record low at 119.00, and above retracement support. A break above January’s high at 141.55 should also set off another round of short-covering.
Therefore one-month at-the-money implied volatility should remain above 20.00% for many more weeks. Note that the FX market at the moment looks more like a line-up of the ugly than a beauty pageant. It is a question of the least evil, the currency with the least bleak prospects, the lesser of two evils. Interest rate differentials zero when rates are zero.

GBP/USD

Chart Levels:

Support 1.4150..1.4050..1.3800..1.3500.

Resistance 1.4600..1.4900..1.5000..1.5375.

Consolidating rather nervously under trendline resistance and a rapidly thinning Ichimoku ‘cloud’. Expect more work under here this week with retracement support at 1.4050 hopefully limiting the downside (though we cannot rule out a brief ‘spike low’ in thin market conditions today). Cable is no longer oversold, bearish momentum is now zero, and should turn bullish on a weekly close above the 50-day moving average at 1.4560. Another clear-out is likely on a sustained break above 1.5500. Because volatility has been so extreme over the last month a squeeze up to here by the end of February is a distinct possibility. Note that open interest is still half of last year’s peak suggesting many have given up speculating in this pair.

EUR/GBP

Chart Levels:

Support 0.8800..0.8635..0.8575..0.8500.

Resistance 0.9085..0.9130..0.9285..0.9520.

Rather messy as price action neither holds retracement support nor the Ichimoku ‘cloud’. This suggests more rather random moves this week roughly inside the ‘cloud’. Note that on the Bank of England’s Trade Weighted index it is hauling itself up from December’s record low and still has masses of room for improvement. We shall continue to plan for extreme volatility and price long-dated options accordingly, one-month at-the-money implied volatility holding above 14.00% for several more months, possibly pushing above the record high at 21.50%. The process is one of weighing up Britain’s vulnerability to crumbling financial services versus its ability to ‘go it alone’ on exchange and interest rates.

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Published on  Mon, Feb 16 2009, 10:38 GMT

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