Weekly Technical Commentary

Nicole Elliott from Mizuho Corporate Bank at 11/30/09

Chart Levels: 

Support 85.85..84.82..84.45..83.35. 

Resistance 87.10..87.45..88.55..89.20.

Our patience has paid off and we got the test of the key 85.00 level (low 84.82). Readers with memories shorter than ours should note that under 85.00 the yen spiked to a record low of 79.75 over a three month period only, and after that never traded close to there again. In other words, statistically significantly unusual levels. Many other currencies are trading at extremes too so the threat of verbal or actual intervention is high, as are the addition of other policy measures to weaken their currencies. Though they will never say so, the US authorities are planning to devalue their way out of their debts. How this will affect their banks is not so clear, but is certainly one way of shrinking balance sheets. More cautious downside testing due.

Chart Levels: 

Support 1.4955..1.4880..1.4800..1.4700. 

Resistance 1.5085..1.5145..1.5250..1.5300.

Risking ridicule, we suggest that ‘this time round it will be different’. Unlike the meltdown in 2008, this year there are probably few non-core assets to flog and repatriate to prop up core business, but also because the Middle East is pegged to the US dollar it risks dragging the greenback down with it should it go under. Over the year-end we continue to expect another bout of generalised US dollar weakness, a feature that is likely to be repeated again and again over many months. The Euro will likely be somewhere in the middle of the pack, neither the best performer or the worst. Friday’s very strong ‘hammer’ after the sharp retreat from this year’s high at 1.5145 suggests seeking direction.

Chart Levels: 

Support 129.00..126.95..126.00..125.50. 

Resistance 130.85..132.00..133.60..134.35

Such a pity that yen crosses did not manage a really decisive weekly close below key support. But then maybe we should have got used to the terribly slow cautious moves that have dominated this year. Though the Euro is oversold against the Yen, bearish momentum is now stronger than it has been since April 2009 so hopefully we will get the weekly close below trendline support and the bottom of the very big Ichimoku ‘cloud’ this week. This effect will be mirrored across all Yen crosses so very much a Yen buying situation. Some currencies have more room to drop than others. As always, the Japanese authorities will fret, their increasingly empty tool-kit unable to cope with current FX levels.

Chart Levels: 

Support 141.40..140.00..139.25..143.00. 

Resistance 144.00..145.50..147.00..148.65.

Testing October’s low and closing just below the bottom of the large Ichimoku ‘cloud’ but well above first Fibonacci support. Rather slow but very neat work and though oversold it suggests there is enough bearish momentum to keep the trend moving lower. A monthly close below 140.00 would probably cause a sudden slide to the 130.00 area. We expect the Yen to gain against all other currencies, so that yen crosses drag each other lower one step at a time, moving towards last year’s extreme lows. Being closest to that low (record 118.80) GBP/JPY may have less downside scope than others. In this case one-month at-the-money implied volatility should pick up from the current 18.00% (and last week’s 15.65%) to 22.00%.

Chart Levels: 

Support 1.6460..1.6260..1.6100..1.5700. 

Resistance 1.6745..1.6880..1.7044..1.7520.

Though still well within the range that has held since June, last week’s large ‘doji’ candle suggests this market is looking for direction. Implied volatility ought to pick up over the coming month, exacerbated by thin markets. A weekly close above the top of the massive Ichimoku ‘cloud’ (or a monthly one above 1.6700) might add some much-needed bullish momentum, while a break above this year’s high at 1.7044 is needed to set off the next rally, forcing many into short-covering and reviewing their outlook. Investors are reluctantly being dragged in to buy Treasuries, at the moment favouring five-year as two-year already yields next to nothing. A lot more flattening of the yield curve is due.

Chart Levels: 

Support 0.8975..0.8895..0.8833..0.8750. 

Resistance 0.9155..0.9200..0.9240..0.9300.

Britain and its banks in the limelight again as another shoe drops. Hopefully Fibonacci resistance and the top of a large Ichimoku ‘cloud’ will limit the upside for Euro/Sterling, forming a new interim high. One-month at-the-money implied volatility rallied from the 10.00% area as expected and should move back up to 14.00% towards year-end. While moving averages and the ‘cloud’ continue to suggest a short position other indicators are not nearly as clear as they were two weeks ago and the overall picture is becoming more mixed. The danger then is that prices move broadly sideways, in a yet to be determined band, for many more months. All in all this pair continues to be hard work and disappoint.