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USD/JPY: Sudden slide to the all−time low at 79.75 should not be ruled out

Nicole Elliott from Mizuho Corporate Bank at 10/12/09


Quarterly Outlook for EUR

Comment: Having seen the short-squeeze to 1.4800 we had predicted for Q3 2009, our view remains unchanged and we shall allow for consolidation between here and the psychological 1.5000 until year-end. However, do not expect this phase to hold neatly between these two points; on the contrary, random price swings are likely to become increasingly sharp as the market looks for direction. We are currently pencilling in range roughly between 1.4400 and 1.5100. Again if anything the Euro might overshoot to the upside late in Q4 2009 as year-end pressures build, taking it up to 1.5500. Were this to be the case one-month at-the-money implied volatility should rally from the current 10% to 15%.

A weekly close below 1.4200 forces us to review.

Quarterly Outlook for GBP

Comment: Though Cable rallied to 1.7000 in July as expected, subsequent price action looks increasingly top-heavy and is a potential ‘head-and-shoulders’. It is now hovering just under the ‘neckline’ but rather than turn extremely bearish we shall allow for a period of correction and consolidation, possibly with some fairly sharp moves. In other words Fibonacci retracement support might cause a truncated bear move where measured targets from the topping pattern are not met. We might end up with a pattern where price action since June turns into a huge ‘rectangle’. Proceed with caution and a good dose of scepticism, where the likely range is 1.5250 to 1.6300. Next year Cable should rally through this year’s high at 1.7045.

A monthly close below 1.5000 forces us to rethink.

Quarterly Outlook for JPY

Comment: Price action in Q3 2009 has, once again, been fairly subdued so that one-month at-the-money implied volatility has traded around 14.00% for a total of six months; nevertheless we feel this should increase towards 20% in Q4. The reason for this is because we expect JPY to drop below September’s low at 88.23 causing serious and repeated downside testing (and potential verbal intervention and maybe more) of key support lying between this year’s low at 87.10 and 85.00. We still favour generalised US dollar weakness, the Yen one of the best performers. A sudden slide to the all-time low at 79.75 of April 1995 should not be ruled out.

A weekly close above 94.00 postpones all of the above and we would have to adjust significantly.

Quarterly Outlook for EUR/GBP

Comment: Most of the last quarter this currency pair traded steadilyif drearily above key support at 0.8400. Price action over the last three weeks has been far more volatile, caused by ill-conceived comments from central bankers, taking it above the 0.9100 we had thought would mark the top of any rally (high 0.9304). Hopefully this will turn out to be a ‘spike high’ and ‘false break’ above the top of a potential massive ‘flag’ formation. Were this to be the case, we would then expect a slow drift back down to 0.8800 over the next two/three months.

Plan B, a rather terrifying prospect, involves a sustained break above the top of the ‘flag’. In theory this would set off a sharp rally to 1.0300 which, the minimum measured target from the ‘flag’.

Quarterly Outlook for EUR/JPY

Comment: Having topped against June’s high at 139.25 as expected, the ‘triple top’ should complete this month with a weekly close below 128.00. This should trigger a slide to the centre of this year’s very broad trading range at 125.65 and probably to 122.50 shortly after that. Very late this year and early in 2010 we favour a cautious re-test of 2008’s low at 113.62 and maybe this year’s record low at 112.00. Note that downside chart levels are neither clear nor strong.

A weekly close above 135.00 would force us to review and postpones any serious downside testing for another six months or more.

Quarterly Outlook for GBP/JPY

Comment: This cross formed a ‘double top’ against June’s high at 162.50, with variations on a theme of topping activity in a whole series of other Yen crosses, leaders and laggards pulling each other in different directions. Having dropped to 140.00 bang on when expected, allow for a little hesitation around this point this month because it is the mid-point of this year’s very broad sideways trading band. Later this quarter we favour a cautious move down to 135.00 (Fibonacci 61% retracement) and probably 130.00 where a very lengthy and tortuous basing process ought to start.

A weekly close above 152.00 forces us to review and postpones any potential downside test significantly.

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