Chaos in the Eurozone/Yen Intervention

In my Congestion Count and the Yen, I stated that for the time being at least the pressure on the euro had abated, taking its cue from the positive signal on the euro/yen cross. The threat of Japanese intervention materialised last weekend, but, in contrast, the initial impulse higher could not be sustained. This was undoubtedly caused by the curve ball from Greece, which few expected.

Markets nearly always react to unexpected news events and this has been no different. The eurodollar had already begun to reverse last week, as it was clear there would be no finance ministers meeting as promised at the weekend, but the damage inflicted by the referendum could be far more serious. That said, treasurers must remain aware of the possibility of a breakup that would actually mean the removal of peripherals, and therefore a stronger euro.

In such uncertain times, it is therefore critical to know what the key points of interest are technically. For the eurodollar the key level above is 1.3940. Weekly closes above remove the immediate pressure. The downside is where the real worries remain – as the rally from June 2010 was swift. What moves up quickly can also fall quickly. The points at 1.3540 and 1.3415 are pivotal. Daily closes below the latter open up the possibility of a swift fall to 1.3044. That support is not strong, so any further break sees a liquidation based rout to at least 1.2466. The large gaps between levels of support highlights how swift falls can be.

On the yen, there is the possibility that the market could do what the Bank of Japan (BoJ) has consistently failed to do: sustain a rally. On my visits to Japan over many years, what is clear is that the domestic Japanese market has the ultimate in crowd following properties, as everyone uses the same tools: a candlestick chart and the study called Ichimokukinkouhyou. Certain patterns are so well known within the trading community that extended and swift trends can develop as everyone jumps on the same side. This can happen in the next few days as a powerful combination is building.

First, price has moved above the horizontal cloud cover, which it failed to get close to on the last intervention. Second, the cloud is threatening to switch direction from blue to red, which is an indication that the trend is up. Therefore, the risks remain of further strong rallies if the market can maintain its value post payroll on Friday.

Figure 1: US Dollar/Japanese Yen Index

Source: CQG




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Mark Carney Bank of England