The week ahead in the Forex and other markets

This week the focus is on one currency that should act as a barometer for all other pairs and even other markets and indices. I spoke about it on the special webcast this last week and it is the Japanese Yen. I won’t go into much detail this time about the fundamentals except to say that there is still a lot of anxiety in the markets regarding the liquidity issue around the sub-prime mortgages. This is the current major driver of virtually all world economics. The constant question on everybody’s mind is still; If the US sneezes does the rest of the world catch a cold?

How does the Yen act as a barometer regarding other currencies and indices?

Studies have shown that the EUR/JPY currency pair has been in relative parallel with the MSCI World index which is a selection of stocks from the larger stock exchanges world-wide rolled into one index. Many technical annalists would say it to be over 90% correlated.

So as the EUR/JPY has moved up and down over the years so has this index and also worth noting is that the Dow Jones and S&P have followed similar paths.  So this brings us back to the JPY Carry-trade and its potential unwinding. As you see on the charts I’ve posted, one thing that is hard to argue is the simple observation that this pair either moves up or down with definitive momentum and spends very little time consolidating or moving sideways. That said; look at where we are at, in terms of the momentum since last July when we had a strong correction. Now take a look at where the price is hovering as it appears that a breakout will be coming shortly in either one direction or the other. This looks like a threshold point. I’m considering a break above 166.00 and then 167.74 to be the trigger barriers going up and 160.50 and 158.67 to be the barriers to break going down.

What if the EUR/JPY goes up?

If the move is to the upside I would expect business as usual with momentum remaining in the Bulls favor on most indices. The general trend remaining up on the Dow and likely continued strength for the EUR and CAD.

What if it goes down?

If we break below the levels I have mentioned then I would expect a reversal of the general trend on most indices (if not all) towards the downside, and a reversal of all general trends on the currencies. Meaning that we should see at least for the short to medium term, some strength come back to the USD. 

My bias at this point is to expect some movement towards higher levels for now, knowing a sudden and sharp reversal is possible.

Pierre Charlebois - VP Trading Solutions

TECHNICAL OUTLOOK – DAILY CHARTS

EUR/USD
Resistance: 1.4775
Support: 1.4465
Sentiment: mixed

GBP/USD
Resistance:2.0675
Support: 2.0320
Sentiment:  bearish

AUD/USD
Resistance: 0.9100
Support: 0.8740
Sentiment: mixed

USD/JPY
Resistance: 113.35 
Support: 109.15
Sentiment: bearish

USD/CAD
Resistance: 1.0015
Support:0.9530
Sentiment: mixed to bullish

USD/CHF
Resistance: 1.1450
Support: 1.1000
Sentiment: mixed to bullish

GPB/JPY
Resistance: 232.45
Support 219.35
Sentiment: mixed to bearish

EUR/JPY
Resistance: 164.30
Support: 161.55
Sentiment: mixed