Weekly Technical Commentary

Nicole Elliott from Mizuho Corporate Bank at 01/11/10

Chart Levels: Support 91.00..90.00..89.30..88.00.

Resistance 93.15..93.78..94.65..95.30.

The very sharp rally from a multi-year low at 84.82 is one of the biggest monthly moves higher in years, only eclipsed by the ten yen rally in March 2008 and a fifteen yen one in January 2002. We think it stalled last week at 93.78 with a ‘doji’/’spike high’ weekly candle against ‘channel’ and Fibonacci retracement resistance. Also because the USD had become overbought against the yen while bullish momentum was dropping quickly. Adding to our view is the fact the Lagging Span has also met Fibonacci resistance and the bodies of the candles of 26 weeks ago. All other elements of the ‘cloud’ chart suggest a short position still despite January’s countertrend corrective rally. Allow for many re-tests of 85.00 this year.

Chart Levels: Support 1.4400..1.4325..1.4220..1.4180.

Resistance 1.4575..1.4700..1.4800..1.4900.

Bouncing from medium term Fibonacci retracement support as the Lagging Span garners support from a very large flat-topped weekly Ichimoku ‘cloud’. Note that all other elements on this weekly chart point to a core long Euro position. On the ECB’s Effective Exchange rate the Euro is not particularly expensive, trading at the mid-point of last year’s range while one-month at-the-money implied volatility is back to its long term average at 10.25%. The rally we now expect might be stronger than many expect in that it could unwind all of December’s move which was caused in part by very thin market conditions. The very long term trend in our view is for continued generalised USD weakness.

Chart Levels: Support 131.25..130.75..129.65..128.00.

Resistance 134.55..135.50..136.00..138.50

This yen cross is very mixed indeed, trading in the middle of the broad band that has held for most of last year and within a huge weekly Ichimoku ‘cloud’. This thins dramatically mid-March so maybe we shall have to wait until then to get a decisive move outside recent ranges. Also be warned that it could lead to an initial ‘false break’. We still favour a downside move next but our resolve has been tested by some other yen crosses which are trading higher than they did in 2009 (AUD/JPY, CAD/JPY, IDR/JPY and KRW/JPY). At the moment we see these are some sort of ‘extension’ but we warn that we might have to change our long term view. This is not something we tend to do very often and would do so reluctantly.

Chart Levels: Support 147.80..147.00..146.00..145.00.

Resistance 149.25..150.70..151.75..153.25.

Though last month’s rally might look impressive to some, it merely continues to keep prices within the range established over the previous three months. Trading sideways between the 9 and 26-week moving averages, set to drop below the bottom edge of the massive weekly Ichimoku ‘cloud’ by default as this thins dramatically in March. Weekly moving averages still point to holding shorts and a weekly close below the cloud might turn momentum decidedly bearish. However, with other yen crosses pulling in different directions perhaps the best we can hope for here is even more sideways work this month and possibly next one too as the yen and sterling lose out against this year’s ‘darlings’.

Chart Levels: Support 1.6200..1.6100..1.5900..1.5700.

Resistance 1.6400..1.6600..1.6800..1.7044.

The very large Ichimoku ‘cloud’ thins dramatically in February so maybe then Cable will at last be able to break free of the range that has held since June. This fairly extraordinary straightjacket, the upside limited by a flat-topped ‘cloud’, the downside by Fibonacci retracement support, is not entirely unusual for this currency pair which tends to alternate in phases of sharp moves and then (usually more messy) consolidation. Interestingly 1.6375 is the mean of the last thirty years so maybe this explains the reluctance to move away form this neutral point. A break above last week’s high at 1.6242 might turn momentum bullish, while a weekly close above the moving averages would probably give sterling another boost.

Chart Levels: Support 0.8930..0.8850..0.8833..0.8750.

Resistance 0.9055..0.9125..0.9155..0.9240.

'Little to add as we trade sideways in the very same range, alternating up and down weeks, for four consecutive weeks. The series of descending highs since December is intact and tops are limited by Fibonacci resistance. While the lower edge of the flat-bottomed cloud continues out until early April, it thins to nothing mid-February so maybe a break lower is more likely then. Long term we remind that while above the pivotal 0.8400 the risk of sudden sterling weakness against the Euro remains. Despite this we feel that the intermediate trend, over the next couple of months, is for this pair to drift down towards 0.8500 again, probably with much sideways consolidation at the 0.8750 level.