Yen Pairs retreat from critical levels… But don’t take your eyes off the charts too long!

Last week I posted a shot of a Head and Shoulders pattern on the GBP/JPY and just as the price approached the critical level we saw an abrupt about face in the general direction on the currency. This is not unusual and I have heard it said that sometimes a failed signal can be the best signal in representing the next opportunity. 

That said though the pattern is still valid. The two things we need watch for now are: A) A break of the neckline to confirm the pattern or B) a new high above the second shoulder to invalidate it. In fact it is not uncommon to see that kind of retreat to such an important barrier on the first attempt. Let’s see what happens when the price action comes back for another try. In fact I’ve place a longer term view of this currency pair to show what happened the last time a Head and Shoulders pattern appeared. This one is inverse and definitely started a new general direction on the pair. So keep a very close watch on all JPY pairs for breaks below their August low’s.

Fundamentally it is hard to sometimes understand that a reaction on the stock markets have a strengthening effect on the Yen. This however is the case as the Yen strengthens when traders move to reduce risk.  In the news is how there is wide spread opinion now that the Shanghai exchange may be a bubble in the bursting stage and this could have a domino affect on everything else. What is still yet unknown of course is just when the next attempts at these critical levels will take place. However I can say that in the short term I noticed a ‘Diagonal’ or ‘Wedge’ on a 15 minute EUR/JPY at market-close on Friday. Look for a sudden burst of activity at market open on Sunday.

What about the USD versus the GBP and the EUR.

Last week I talked about how the EUR and GBP where flying a little too high for political and economic comfort and we are now starting to see that these currencies couldn’t keep going in one direction. Although the news isn’t great out of the US it seems that pour news out of the Euro Zone is giving back some momentum to the Dollar. But don’t get too comfortable thinking this is for sure the top as there is now strong belief a large US interest rate cut is coming again on December 11^th. Traders and economist may start pricing in this expectation starting next week. Let’s watch the highly anticipated Employment numbers this coming Friday to get a sense of what may be to come the following week.

A quick note on the CAD

We should see a little bit of rejection here and then some consolidation around the par level for the next week or two. The Canadian will be going through a bit of an identity crisis now if Oil continues to drop. It’s going to walk to its own drum for a while I think.

Have a great weekend and positive trading week.

Pierre Charlebois

TECHNICAL LEVELS

EURUSD
RESISTANCE: 1.4910
SUPPORT: 1.4520
SENTIMENT: BEARISH

USDJPY
RESISTANCE: 112.90
SUPPORT:108.50
SENTIMENT:BULLISH

GBPUSD
RESISTANCE:2.0835
SUPPORT: 2.0355
SENTIMENT: BEARISH

USDCHF
RESISTANCE: 1.1510
SUPPORT: 1.1160
SENTIMENT: BULLISH

USDCAD
RESISTANCE: 1.0155
SUPPORT: 0.9820
SENTIMENT: BULLISH

AUDUSD
RESISTANCE: 0.8955
SUPPORT: 0.9725
SENTIMENT: BEARISH

GBPJPY
RESISTANCE: 231.30
SUPPORT: 222.40
SENTIMENT: MILDLY BEARISH

EURJPY
RESISTANCE: 165.05
SUPPORT: 158.70
SENTIMENT: BEARISH

Will the Carry Trade unwind?
Last week we saw the JPY gain against all 16 major currencies and we are now sitting at a critical point technically. The fundamentals do appear to be coming together as Zoltan has been saying, for this to be the year of the Yen. In January of this year, Zoltan Vass (our Chief Economist and Chairman), delivered a presentation on what to expect for the year. He stated $140 on the Euro was in sight and that this would be the year for the Yen, especially in the second half.  Well we are now just shy of $1.50 on the Euro and of course we know what happened in August on the JPY pairs. What’s next?

Last week I wrote about how we need to stay focused on the JPY as we are in a range that when we break out, we will likely see the longer term direction immerge. Specifically I said watch the EUR/JPY as our barometer for other moves. Look at where we are now and ask yourself what is likely to happen when institutional traders return to trading this coming Sunday/Monday. The added volume that was absent due to the US Holiday will undoubtedly start some volatility in all equity and Forex markets. We made it below the first important barrier of 160.50 and although we quickly retreated, the next important barrier is well within striking distance. The technical void below 158.72 provides fertile ground for further decline. BTW… take a look at the potential Head and Shoulders pattern on the GBP/JPY. What would a break below 220.00 produce?

The politics of a $150 Euro
Something I have been watching for this week is how the Euro Zone exporters are reacting to such a high Euro. In the news this week from London, comes a report that Airbus, the second largest Airliner manufacturer has done a flip flop on how it is affected by such a strong Euro and British Pound. A week ago their statement was that it was not such a bid deal and now this week, they claim to be losing as the Euro rises and the Dollar falls. Airbus is in a precarious place right now having just started delivery of the worlds newest and largest Jumbo liner, 2 years latter than promised with of course extreme overruns and the threat of lost orders. What are the European politicians going to do as Airbus’ profit and viability becomes jeopardized as the Euro continues to climb. Airbus is an enormous company and is a conglomerate of the assimilation of many of Europe’s aeronautics’ businesses, that represents exactly what the Euro Zone and the Euro itself is supposed to be. A sudden decline or at worst a failure of such a company at this time would potentially undermine a great deal of the recent gains made economically by the Euro Zone. I think at this time we will see European politicians start to support the idea of a reduction in the Euro’s value fearing too much pressure on the local exporters.

Politics of an interest rate change in the USA
The other thing that will be brewing over the next week or so is the rumors surrounding the next FOMC meeting and subsequent interest rate decision. In the week just passed we have seem the sentiment flip-flop between keeping the rate steady and decreasing it further. At this time the fears seem to be about a US recession so a further reduction in the rate is favored (at least for now). Let’s see how this enters the mix if the carry trade bottom falls out and whether the Euro Zone considers policy to reduce the value of the Euro.

A quick word on the USD/CAD
Well, we do seem to have put in a Key reversal. The question here is; have we seen the significant turn. My perspective on this as a trader is to ask what is going on with the Loonie that makes it different from other currencies trading against the USD. Virtually all other Dollars pairs have gained or at least not weakened anything close to what the CAD has in the past two weeks. This could be the beginning of trader sentiment towards a possible re-strengthening of the USD. After all, Oil and Gold are making records while the Canadian retreats. This is completely different to what we had seen over the previous 12 months. What is underlying here in the psyche of trader mentality of this pair? Will we look back on this move and say; this pairs was giving us clues as to what was to come on other USD pairs.

I do hope we you have all had a great Thanksgiving.

Pierre Charlebois – VP Trading Solutions

EUR/USD
RESISTANCE: 1.4965 – ALL TIME HIGH, 1.5000
SUPPORT: 1.4705
SENTIMENT: UPTREND RELENTLESS, BUT STARTS WANING, CORRECTION IS DUE
 
GBP/USD
RESISTANCE: 2.0800
SUPPORT: 2.0355
SENTIMENT: MIXED TO BEARISH
 
USD/JPY
RESISTANCE: 110.55
SUPPORT: 106.50
SENTIMENT: BEARISH
 
USD/CHF
RESISTANCE: 1.1145
SUPPORT:1.0895
SENTIMENT: MIXED, SEEMS BOTTOMING
 
USD/CAD
RESISTANCE: 1.0095
SUPPORT: 0.9705
SENTIMENT: BULLISH
 
AUD/USD
RESISTANCE: 0.8995
SUPPORT: 0.8540
SENTIMENT: BEARISH
 
GBP/JPY
RESISTANCE: 225.85
SUPPORT:217.40
SENTIMENT: BEARISH
 
EUR/JPY
RESISTANCE: 162.60
SUPPORT:156.30
SENTIMENT:BEARISH

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

 The Carry trade is unwinding again…

So what’s in store for Sunday afternoon market opening? The JPY rallied like we haven’t seen since August of this year. Remember in one week in August we saw a 1600 pip drop in the EUR/JPY when the markets tumbled along with it.

It appears investors and traders are moving back into risk aversion mode which means moving away from things like the Carry Trade. Combine this with continued news about write-downs for lenders due to the ongoing concerns of the sub-prime debacle and we have a perfect storm brewing all over again.

What this means for the EUR and GBP versus the USD.

In essence what happens short term with these currencies is a strengthening of the USD. Investors/traders take profits out of the markets most often in the form of US Dollars so this tends to create an immediate short term strengthening of the USD. Let’s also remember that the USD is at an extreme against most of its counterparts so the timing of this may be another factor to consider.

And what of the High Flying Loonie?

Another incredible week for the CAD, setting more records in the process. What was very interesting on the CAD was the 250 pip movement in both directions in a single day. The downside is now starting to appear limited and if we haven’t yet hit the bottom we can’t be far off. This currency pair has been breaking all the rules technically and is due for at least a correction. What may buoy the Canadian is if Oil and Gold continue to soar. BUT… if they come off… the loonie could do a bit of a crash landing.

What to expect next week

We are moving closer to a reversal on most of the major trends. The question remains if we will see the pairs double top/bottom or if lows and highs are in place. Watch the opening of the Forex market Sunday afternoon for clues as to how the week may start. A sharp drop in the Asian markets could also signal more downside coming for the week on the European and North American markets. There are still many forecasts calling for $1.50 on the EUR so the larger turn might not happen until after we have hit this mark. What I expect if that happens is a very strong reversal shortly thereafter.

Have a great Memorial/Remembrance day.

Pierre Charlebois – VP Trading Solutions

Technical Levels