Weekly Technical Commentary
Nicole Elliott from Mizuho Corporate Bank at 10/20/09
Rallying from 88.00 towards the 9-week moving average and first Fibonacci resistance, taking a few Yen crosses to new highs for this year (AUD/JPY, NOK/JPY and NZD/JPY). We still feel 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 from almost oversold against the Yen, the US dollar is now almost overbought.
Rallying to a new high for this year at 1.4968, a level that capped for many weeks from November 2007. It is possible that the Euro might struggle under here for a few weeks still, but we feel that the weekly close above 1.4800 will counter this allowing it to trade higher through to the end of this month. This marks another bout of generalised US dollar weakness, a feature that is likely to be repeated again and again over many months. The Euro is slightly overbought but then bullish momentum has increased significantly, and now even US stockbrokers are talking of the currency effect on share prices and economic conditions. Futures volume remains at the 2-year average.
Rallying once again from trendline support, the fifth time it has done so since late March. Though this latest rally went higher than we had thought, having the patience of Job we shall continue to watch for signs of topping in what could turn out to be a massive ‘quadruple top’. The Euro is now very overbought against the Yen, but we have to admit that bullish momentum is strong. Other currencies are even more overstretched against the Yen. We favour a new interim top forming between 136.00 and 137.50 either this week or next. 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.
Reversing positions as Sterling, the previous week’s ‘dog’, overtook a weaker Yen. Despite sharp moves, surprisingly one-month at-the-money implied volatility has barely budged. Nevertheless the bounce is clearly corrective and has, for the time being anyway, stalled at the first Fibonacci retracement. Daily moving averages and the Ichimoku ‘cloud’ still point to a short position so we shall watch for a new interim high to form over the next week or two, though it might take even longer. A weekly close below 147.00 should also turn 50 and 200-day moving averages bearish. Sterling is overbought and we shall look for a new interim top to form between 149.00 and 151.50.
Just as we had feared: the irregular ‘head-and-shoulders’ top failed to meet even it’s first downside target, stopped dead in its tracks by first long term Fibonacci support and the 26-week moving average. It formed a ‘bullish engulfing’ candle on the weekly chart hinting that it ought to hold above 1.5700 through to year-end (and then more). However, because the weekly Ichimoku ‘cloud’ is so very large we could easily hold inside here until year-end, trading randomly in zigzags regularly re-testing the 1.5700 area. One-month at-the-money implied volatility rallied from 10.65% and should rally to 14.50%. Futures volume remains high suggesting this is the only ‘cheap’ currency for Americans to diversify into.
Apparently we are not alone in getting this pair wrong; since June Reuters Polling have median forecasts dropping for this pair, down to £0.8700 in 12 months’ time the latest stab at forecasting. Last week’s ‘bearish engulfing’ candle has at least bought a breathing space for the pound, and the top of the Ichimoku ‘cloud’ dips after the first week of November, a combination which just might allow for broadly sideways trading for several months yet. However, weekly moving averages are bullish, upside momentum strong, the Euro no longer overbought and on the Trade Weighted basis it is still perilously close to the all-time low. Be very careful indeed and prepared to shift view.