Weekly Technical Commentary
Nicole Elliott from Mizuho Corporate Bank at 10/12/09
Taking fright at 88.00, ahead of January’s low at 87.10, a level that held miraculously some might say. This latest bounce will probably be capped around 91.50 and while below 92.55 we continue to favour a series of cautious downside tests of key support between 87.00 and 1995’s 85.00 (below which it spiked to a low 79.75 over a three month period). This in the context of generalised US dollar weakness which we expect through to year-end and probably a lot longer. The slower the move, the longer it should last. Note that at the moment the US dollar is not oversold against the Yen but bearish momentum has eased very considerably. A weekly close below 88.75 should see it increase significantly.
A small potential ‘double top’ at this year’s high of 1.4845 suggests another week or two of gentle correction and consolidation. Expect a re-test of the area between the 9 and 26-day moving averages, which is also first short term Fibonacci support, and maybe all the way down to 1.4400. This should correct the slightly overbought situation and allow the Ichimoku ‘cloud’ to move up a couple of notches by month-end. This coupled with trendline support should then allow to Euro (and other currencies) to gain against the greenback. A weekly close clearly above 1.4700 is needed to increase upside pressure resulting in another round of generalised US dollar weakness.
Having spent the best part of a fortnight dithering around trendline support, prices formed a tiny inverted ‘head-and-shoulders’ which has already almost met its minimum measured upside objective. The Euro is no longer oversold against the yen and momentum is neutral. This has obviously postponed the break lower we had expected but while below the daily and weekly Ichimoku ‘clouds’ there is no reason to change our view: the yen should strengthen against many currencies between now and year-end. Towards the end of November we expect a break below the pivotal 127.00 support area. The very long term view is still for more broadly sideways moves in a very wide band.
Sterling weakening across the board, a whopping 4.3% against the Canadian dollar month to date, has kept this yen cross at last week’s level hovering on the first long term Fibonacci support. Weekly moving averages have turned bearish and it is just a matter of time before we break decisively below the massive Ichimoku ‘cloud’. Our measured target remains at 130.00, 61% Fibonacci retracement. Below 129.00 on a first attempt is considered highly unlikely, though note that moves below here are likely to be complex and very sharp. We cannot rule out a re-test of the all-time low at 118.80 of January this year as sterling looks set for a horrible year-end.
Consolidating under the ‘neckline’ of an irregular ‘head-and-shoulders’ top and now testing the 26-week moving average and 38% Fibonacci support. We shall continue to allow for a sharp drop, to the 1.5575 area and probably no lower than 1.5275. This drop should end suddenly, more than likely with a ‘spike low’. Note that this corrective move lower might be difficult to trade and will eventually see a resumption of what we feel is the long term trend to higher Cable. Because the weekly Ichimoku ‘cloud’ is so very large we could easily hold inside here until year-end. One-month at-the-money implied volatility rallied from 10.65% and should move on up to 14.50%. Futures volume, though not open interest, remains high.
Last week’s one small chance of sterling regaining its balance and a toehold was squandered. This bodes badly for the pound, here and against all other currencies – just a question of degree. It is currently weaker than it was in 1995/1996, against the Euro and on the Bank of England’s Trade-weighted basis. It now looks almost inevitable that it will re-test the record high at £0.9805 set in January, despite decent resistance around £0.9600. Weekly moving averages are bullish, momentum as strong as it was in December, and the measured targets from the enormous ‘flag’ are 1.0300 and possibly 1.1000. Remember the Chinese proverb: ‘be careful what you wish for’.