USD/JPY
Chart Levels:
Support 90.00..89.00..88.00..85.00.
Resistance 91.00..92.00..93.00..94.65
The rally in the first three days of this year is seen as a corrective bounce which ended with a ‘spike high’/reversal-type weekly candle. The US dollar is no longer oversold and medium term momentum is still bearish. During Q1 2009 we expect further concerted downside testing, grinding lower slowly. Nervous authorities tempted to talk the Yen weaker, especially as we approach the fairly pivotal 85.00 area. For the moment rallies will probably be capped ahead of this month’s high at 94.65 but later this quarter we could see a brief but dramatic ‘spike’ or ‘extension’ above here. One-month at-the-money implied volatility remains relatively high at 17.00% and should hold between 14.00% and 21.00% for several weeks.
EUR/USD
Chart Levels:
Support 1.3312..1.3250..1.3100..1.2840.
Resistance 1.3800..1.4060..1.4365..1.4720.
Slightly disappointing as we give back 61% of December’s rally and close towards the lower edge of the week’s range. Even so one-month at-the-money implied volatility remains not far off the record high 28.00% set in October and we still feel it ought to pull back towards the 15.00% area. On its Effective Exchange Rate basis it has also pulled back a tad from its strongest ever early in 2008 though we feel it is just a matter of time before it sets a new record high. Note that volume so far this year has been very poor and investors uncertain about the outlook for Eurozone countries. Greek and Irish government bond spreads wider as S&P threatens to downgrade their sovereign ratings.
EUR/JPY
Chart Levels:
Support 120.00..117.65..115.85..113.62.
Resistance 124.50..126.25..128.55..130.00.
The very large Ichimoku ‘cloud’ has managed to keep prices below 130.00 and the top of the range established in October. They have now dipped below its bottom edge suggesting a retest of trendline support and possibly October’s low at 113.62. Further out we would caution against over-optimistic downside targets as we currently favour several months of broadly sideways price action with large and random price swings. This should keep one-month at-the-money implied volatility above two standard deviations (14.00%) over the mean but below October’s record high of 42.50%. Other Yen crosses look very similar suggesting USD/JPY moves will dominate price action in Yen crosses.
GBP/JPY
Chart Levels:
Support 134.00..132.50..129.80..128.20.
Resistance 141.50..143.30..148.50..151.70.
The catastrophic collapse last quarter came to a juddering halt ahead of its 1995 all time low of 128.20. It is over two standard deviations from the mean since 1992 and appears to be working in a downward-sloping ‘wedge’ formation just like Cable. One-month at-the-money implied volatility is holding below last year’s record high at 44.25%, but appears to now have based around 22.00% and is moving higher. This suggests that either a ‘false break’ or ‘extension’ lower followed by a very sudden short squeeze is likely this month and maybe during the whole of Q1 2009. We urge extreme caution with Cable moves sometimes working in tandem with, at other times against, those of USD/JPY.
GBP/USD
Chart Levels:
Support 1.4860..1.4660..1.4470..1.4350.
Resistance 1.5400..1.5535..1.5725..1.6000.
Little to add as Cable continues to work in a downward-sloping ‘wedge’ formation against the 1.4500 area with three cautious downside tests already in place. This is still seen as part of a long drawn-out process of forming an interim base. One-month at-the-money implied volatility should hold above 18.00% and could rapidly rise to the 28.00% area on a sustained break above 1.5600. This should trigger a short squeeze to 1.6500 in a very short space of time mirroring the speed of the declines of late October. Similar moves, with a similar feel, can be seen in other currencies that were hard hit last year like the Australian and New Zealand dollars. So nice of PM Brown to agree to
EUR/GBP
Chart Levels:
Support 0.8838..0.8800..0.8750..0.8575.
Resistance 0.9065..0.9175..0.9300..0.9440.
Price action over 0.9000 (equivalent to the all-time low GBP/DEM at 2.1750 of May 1995) looks increasingly like a ‘blow off’ top. The all-time high at 0.9805 is too far beyond the two standard deviations level at 0.8325 to be meaningful. Nevertheless it is close enough to parity to have jolted even the most complacent while thwarting neat newspaper story writers. We shall continue to plan for extreme volatility and price long-dated options accordingly. Should one-month at-the-money implied volatility move to a new record over 25.00%, expect some seriously worried central bankers (or at least they should be). This week expect swings between 0.8800 and 0.94.00, then down again towards the end of this month.
