Some Technical Thoughts

Euro:   It has not closed above its 20-day moving average since late October.  It comes in now $1.3120 and falling around 20 ticks a day.  Ahead of there resistance is likely to be encountered in the $1.3000-50 area.  The 50 day moving average crossed below the 200 day (golden cross) in early October.    Volatility has trended lower most of the month, but the 3-month formed a base near 14%.   It seems that a weaker euro is consistent with a decline in volatility.  Note that the risk-reversals have seen the premium for puts over calls narrows considerably in recent weeks as the euro has fallen.   The premium for puts is about 2.59% now and in mid-Nov hit a record 4.39%.  One way to make sense of this is that the short-term market is short euros and bought some calls for insurance.  A convincing break of $1.2850 area will bring the next target $1.2580-$1.2650 into view. 

Sterling:  It has lost about 0.7% against the dollar in Q4 compared with the euro's 3.3% slump in the same time.  The 50 day moving average crossed below the 200-day moving average in late Sept, shortly before the euro's moving averages crossed.  The 5 day average crossed below the 20 day average in the middle of the week.  While the euro's lows for the year were just recorded, sterling was set in early Oct near $1.5272.  A break of there may spur a move toward $1.50 and then $1.48.  The $1.58 area now marks important resistance. 

Yen:  The record BOJ intervention on Oct 31 essentially took much of the volatility out of the yen.  Just before Xmas, 3-month yen vol hit the lowest level since 2007.  The JPY78.30 area marks an important cap, while support is seen near JPY77.  That said, look for a test on the JPY76 area in Q1 2012.   The yen has been the strongest G10 currency in 2011, appreciating almost 5% against the dollar.  The euro is the weakest, losing 3.25%.  In the fourth quarter, where the euro's losses for the year were recorded, the yen was largely flat (off 0.4%). 

The Commitment of Traders is interesting to get a sense of short-term market positioning, but are not always  very useful for market timing.  The foreign currency market is primarily a cash/OTC market.  The exchange traded products are quite minor compared with the average daily volume of $4 trillion.  That said, net speculative short euro is near a record.   There is nothing preventing a new record.  Some patient players may look to sell into a short squeeze, though it may happen from lower euro levels.