Weekly Technical Commentary

Nicole Elliott from Mizuho Corporate Bank at 02/08/10

Chart Levels:

Support 89.00..88.55..88.25..87.75.

Resistance 90.00..90.50..91.28..91.88.

Slow work, but perhaps understandable as we hover not that far above key ultra-long term support between 87.00 and 85.00. We have retraced half of the year-end rally and are hovering at the bottom edge of a decent-sized flat-bottomed daily Ichimoku ‘cloud’. Fibonacci retracement support at the 61% level will probably limit the downside this week with prices probably holding in a fairly narrow range around 89.25. Apart from the ‘cloud’ all other elements of this chart suggest a short position, so later this month we favour a decisive break below 88.00. Note that the US dollar is not in the least bit oversold and that momentum is only just bearish. Other yen crosses are some way behind this one and are unstable.

Chart Levels:

Support 1.3620..1.3585..1.3450..1.3250.

Resistance 1.3800..1.3850..1.3965..1.4025.

Dropping even further than feared as the Euro plunges into the chasm formed by the weekly Ichimoku ‘cloud’, dipping below its bottom and the 50% Fibonacci retracement support, because bearish momentum is stronger than it has been since September 2008. Moves this strong are obviously unsustainable and rarely mark the start of a major move. Note how the ‘cloud’ rises and broadens quickly from the end of next week until late May. Market opinion is very much against the Euro at the moment, many saying it will continue to be dragged down by the weaker EU members. It is close to some of the most extreme oversold levels ever and close to record oversold of October 2008. Watch for a clear weekly reversal candle.

Chart Levels:

Support 121.55..120.70..120.00..119.00.

Resistance 123.35..125.00..127.55..129.60

Despite the lowest weekly close since February 2009 small signs of instability have emerged in this currency pair and we would proceed with caution. The Euro is very oversold and bearish momentum is stronger than it has been since April. The weekly close exactly on Fibonacci 61% retracement support at 122.50 is slightly ominous and being just 8 yen from last year’s low is probably a little too close for comfort for the authorities. Many other yen crosses, including AUD/JPY and CAD/JPY are trading well above all Fibonacci retracement support levels which can either be interpreted as lagging badly or, as we favour, that EUR/JPY has got a little ahead of itself. Later in Q1 we favour a drop to roughly the 118.00 area.

Chart Levels:

Support 138.20..137.65..135.65..135.00.

Resistance 140.75..142.00..143.00..145.25.

A weekly close below 50% Fibonacci retracement support and the lowest weekly close since March 2009, yet somehow this is not especially compelling. While it could signal the start of a step-change and a drop to a new lower trading band, we have our misgivings as we feel that in theory this ought to have been more likely when the lower edge of the weekly Ichimoku ‘cloud’ drops sharply in early April. Sterling is very oversold though bearish momentum has picked up. All aspects of this chart point to holding a short position, but maybe not just yet. One-month at-the-money implied volatility has picked up and will probably continue to do so, albeit slowly, over the next two months.

Chart Levels:

Support 1.5500..1.5400..1.5260..1.5100.

Resistance 1.5700..1.5950..1.6000..1.6100.

Breaking below the lower edge of the sideways band that dominated most of last year, simultaneously breaking below the rising lower edge of the weekly Ichimoku ‘cloud’ whose upper edge not only dropped suddenly but capped the last three weeks. Moving averages are now pointing to a short position and the Lagging Span met resistance from the previous weekly candles. Note that over the last month sterling has lost the most ground against the US dollar, the Japanese yen the only gainer. Cable is more oversold than it has been since October 2008 and bearish momentum is truly unimpressive. Open interest is soaring suggesting many have piled in since the end of January. To us it feels unstable.

Chart Levels:

Support 0.8735..0.8725..0.8650..0.8635.

Resistance 0.8800..0.8880..0.8965..0.9025.

Two consecutive if small ‘spike lows’ last month add weight to our view that this pair had got rather ahead of itself and that the break below the lower edge of the flat-bottomed cloud was premature. It is now trying to edge above this very thin weekly ‘cloud’ and is expected to hold above 0.8650 for another month. The Euro is no longer oversold against sterling and downside pressure has almost disappeared. Note that on the Bank of England’s Trade Weighted Index it is currently trading at the mean since December 2008 at 80.00. One-month at-the-money implied volatility has a ‘double bottom’ at 8.50% but upside progress is terribly slow and likely to fade by the time it gets to 10.50%.