Weekly Review and Outlook Underlying Trends in Volatile Markets, Strength in CHF, AUD, NZD and JPY

We had a lot of noises in the markets recently. The US debt ceiling debate remained a major focus as the drama dragged on before the August 2 deadline. Moody's warned earlier in the month of a possible US downgrade. But the rating agency said in a statement on Friday that the triple A rating would likely be kept if the government could continue to pay bond-holders even if a deal can't be reached by the deadline. The Greece situation seems to be solved by markets' focus turned to Spain now as Moody's warned of a Spain downgrade. IMF also said in a report that outlook in Spain is "difficult" with risks "elevated" and the country is still in "danger zone". These noises triggered much volatilities in the markets but under these volatilities, there are trends.

And, the trends that really worth noting are, firstly Dollar, Euro and Sterling are staying in range against each other for the moment. Dollar is a bit weaker against the other two. Sterling also seems to be building momentum against euro. But, they're kept in range as each region has its own problems. Growth in US and UK was dismal. US real GDP grew at 1.3% annualized pace in Q2, substantially below market expectation of 1.7%. Prior quarters figure was also revised down from 1.9% to a very poor 0.4%. UK Q2 GDP grew a mere 0.2% qoq. Outlook in both US and UK reflect fragility in economic recovery and would likely prompt Fed and BoE to add stimulus if situation worsens. Eurozone CPI unexpectedly moderated to 2.5% yoy in July, reducing the need for ECB to continue tightening while the region is still in the middle of the never-ending peripheral debt crisis. The trends between the three currencies are indeed, not too clear.

Secondly, Swiss France and Gold are both strong on safe haven demand. Swiss franc extended the long term up trend and made new record high against Dollar, Euro, and Sterling last week. Gold also jumped to record high against Dollar at 1637. Investors are still in deep concern on the debt problems across the Atlantic. Swiss Franc and gold would likely remain strong in near term ahead.

Thirdly, with all the talk about US downgrade, long term treasuries were still strong. Considering sluggish growth, risk aversion as well as possible reversal in stocks, US treasuries remained one of the preferred place for funds. Yield on 10 year and 30 year bonds both hit fresh low for the year last week. The strength in US bonds, weakness in yields, helped drive USD/JPY lower last week, taking EUR/JPY and GBP/JPY with it. The medium term down trend in yields are confirmed and we'd possibly see 10 year yield heading back to lower side of the range near to 2.35% while 30 year yield would possibly head towards 3.50% level Such development will likely support the Japanese yen further.

Fourthly, Aussie and Kiwi are both strong in spite of risk aversion in the equity markets, both supported by resilience in their economy, strength in the Asia Pacific region as well as commodity prices. The stronger than expected Q2 CPI reading in Australia killed unjustified talk of rate cut from RBA. Instead, markets are back to consensus that the bank would indeed be forced to raise rate again by the end of the year and such expectations boosted Aussie to new record high against dollar. In the post meeting statement, RBNZ delivered clearly the attention to remove the post-earthquake 50 bps insurance cut as 'current global financial risks recede and the economy continues to recover'. It's very likely that the rate hike will place in as soon as September.While also a commodity currency, trend in Canadian dollar is not clear, in particular as weak data cooled speculation of BoC hike in near term.

So in short, we're not too enthusiastic on trades in EUR/USD, GBP/USD and EUR/GBP. Instead, we'd be more interested in going long Swiss Franc and Yen on days of risk-off, and long on Aussie and Kiwi on days of risk-on.

Technical Highlights

GBP/CHF's long term down rend resumed last week and dived to new record low of 1.2880. Current fall should continue in near term and target 161.8% projection of 1.5691 to 1.4168 from 1.5183 at 1.2719 next. 

In the larger picture, we'll stay bearish as long as July's high of 1.3697 holds and expect the down trend to continue to 61.8% projection of 2.4965 to 1.5112 from 1.8113 at 1.2024 in medium term, which is close to 1.2 psychological level. 

NZD/USD's up trend accelerated further last week and made new record high at 0.8797 so far. We're staying bullish in the pair and expect the up trend to extend to 100% projection of 0.4890 to 0.7632 from 0.6560 at 0.9302 in medium term. Key short term support is last week's low of 0.8611 while the medium term key support level is 0.7975. 

Canadian dollar is clearly the weaker one among commodity currencies. AUD/CAD's strong rally last week suggests that pull back from 1.0555 has already finished at 1.0124. Current rise should extend through 1.0555 high in near term to target 61.8% projection of 0.9605 to 1.0555 from 1.0124 at 1.0711. 

In the larger picture, we'll stay bullish in AUD/CAD as long as 1.0124 holds and expect further rise to 100% projection of 0.7168 to 0.9913 from 0.8589 at 1.1333. 

The sharp fall in 10 year yield on Friday took out 2.847 support to close at new yearly low of 2.805. The fall might indeed be reaccelerating based on current structure. 2.688 Fibonacci projection will be a key level to watch in near term and a decisive break there will indeed suggest further downside acceleration ahead for a test on lower side of the medium term range near to 2.334. 

Dollar index attempted for a recovery last week but was limited by near term trend line turned resistance. No change in the outlook that consolidation pattern from 72.69 has finished at 76.71. We'll stay bearish in the index as long as 55 days EMA (now at 74.83) holds and expect an eventual break of 72.69 support to extend the down trend from 88.70. Nevertheless, note again that the outlook in EUR/USD is not cleared yet. And, a break of 55 days EMA in the dollar index will also mix up its outlook too. 

The Week Ahead

US debt ceiling outcome will be one of the major focuses on early part of the week. Four central banks will meet this week, RBA, ECB, BoE and BoJ and all are expected to stand pat. The main market moving one would be RBA and the statement could send Aussie further higher if it delivers a hawkish tone. Meanwhile a number of economic data would be released during the week.

As noted before, firstly Euro, Sterling and Dollar are so far kept in range against each other and the development among these crosses will very much depends on the PMIs and US job data. Also, these data would be important to determine the level of risk aversions and thus determine whether Swiss Franc or Aussie/Kiwi are the preferred currency to go long against dollar, euro and sterling. There are also a number of important data to determine how far the Aussie could go, including Australia retail sales, housing, trade balance and more importantly, China manufacturing PMI. New Zealand dollar bulls will look into New Zealand job data too. Meanwhile, also note that Canadian job data is also featured which could trigger some volatility in CAD crosses even though we don't expect it to change the larger trend.

• Monday: China Manufacturing PMI; Eurozone manufacturing PMI, unemployment rate; UK manufacturing PMI; US ISM manufacturing
• Tuesday: RBA rate decision, Australia building approvals, house price index; Swiss retail sales, SVME PMI; UK construction PMI; Eurozone PPI; US personal income and spending
• Wednesday: Australia retail sales, trade balance; Eurozone services PMI final, retail sales; UK services PMI; US ISM non-manufacturing, factory orders; New Zealand employment
• Thursday: BoE rate decision; ECB rate decision; US jobless claims
• Friday: RBA monetary policy statement; BoJ rate decision; Swiss CPI; UK PPI; Canadian employment, building permits, Ivey PMI; US non-farm payroll

Weekly Fundamentals - Gold has Further to Go...

Commodity price movements continue to be directed by macroeconomic concerns in the near-term. Gold jumped to a new record high of 1637.5 on Friday as US growth missed expectations. The yellow metal's rally to new highs in 3 out of the past 5 days signaled market worries over uncertainties. The debt ceiling debate in the US has dominated the news headline for the whole week. The latest development is that House speaker Boehner's revise plan was passed in the House but was defeated in the Senate. Meanwhile, the majority Senate leader Reid modified his proposal, incorporating Minority Leader Mitch McConnell's '2-step' process (the loan will be provided in 2 installments of 1.2 trillion, one immediate and another when the nation is near the debt limit again) to raise the debt ceiling. Economists generally do not expect the new plan to be the resolution for the debt problems.

On Friday, market sentiment was deteriorated further as US economic growth disappointed in 2Q11. GDP expanded an annualized +1.3% in 2Q11. The market had anticipated a strong expansion of +1.7%. For the first quarter, GDP growth was revised lower to + 0.4% from +1.9% estimated previously. Economists have revised down their forecasts for this year and 2012 after the report. For example, Bank of America Merrill Lynch cut US' growth by -0.6% to just 2.3% in 2012 and pushed back the first Fed hike to 2013. Barclays Capitals reduced the country's growth forecasts to +1.7% and +2.4% for 2011 and 2012 respectively.

As the August 2 debt limit deadline approaches, the market has increasingly worried about a government shutdown and debt default. While our central view remains that lawmakers will compromise on a plan to avoid default, any deal will only be able to solve problems in the short-term, rather than in the long-term. Against this backdrop, as well as slowdown in economic growth and delay in Fed' rate hike schedule, gold should remain well-supported and be able to rally higher from current level later this year.

We have a busy calendar next week. While the market will be closely monitoring developments in the US debt ceiling debate, RBA, BOJ, ECB and BOE will be meeting on monetary decisions during the week. PMIs will also be released and moderation in manufacturing activities in China, the USD and the UK will probably weaken sentiment further.

Energies: WTI crude oil price was pressured last week amid debt uncertainties. The decline accelerated on Wednesday after unexpectedly large stock-builds and on Friday after downside surprise in US growth. The front-month contract declined -4.18% during the week. Brent crude oil price also dropped, recording weekly loss of -1.63%, but price remained within recent trading range of 115-120.

According to the DOE/EIA report, crude stockpile increased for the first time in 8 weeks, by +2.30 mmb, to 354.03 mmb in the week ended July 22. Current level of oil inventory has stayed at the top end of the 5-year range. However, with the release of SPR eventually reflecting in inventory data, the level is expected to rise further and exceed the 5-year range in coming weeks. Fuel demand has been soft. Gasoline demand has averaged 9.09M bpd over the past 4 weeks, down -3.31%, from the same period last year while distillate demand fell -3.51% y/y to 3.48M bpd over the last 4 weeks. The coincidence of SPR release and seasonal weakness in US fuel demand should result in further widening of the WTI-Brent crude spread.

US gas price lost more than -5% during the week. Gas storage increased +43 bcf to 2714 in the week ended July 22. The addition exceeded market expectations and triggered a slump in gas price. Stocks were now -201 bcf less than the same period last year and -65 bcf below the 5-year average of 2779 bcf. Separately, Baker Hughes reported the number of gas rigs fell -12 units to 877 units in the week ended July 29.

Precious Metals: Reuters' biannual poll of precious metals price forecasts indicated that investors are more bullish on gold's outlook than 6 months ago. The survey showed that over 50% of the respondents expected gold price to average 1500/oz or more this year, compared with just over 20% in a poll conducted in January. The median gold price forecasts are 1510 in 2011 and 1575 in 2012, up from January's forecasts of 1453 and 1425 respectively. Macroeconomic uncertainty is the main reason driving investors to Gold.

Although European finance ministers agreed on new measures to contain sovereign debt crisis in peripheral countries, market worries have not been alleviated, as indicated in widening yield spread and CDS spread. Meanwhile, rating agencies S&P and Moody downgraded Greece's rating last week despite the new bailout plan. Both agencies warned that a default is inevitable. These suggest that the measures announced after the EU summit can at most soothe the situation in the near-term while core problems remain unresolved.

In the US, the deadlock over US debt ceiling has hurt confidence. Although in the event that the Congress eventually agrees to a debt ceiling rise, the US still lacks a long-term and feasible plan to reduce deficits. We expect investors, be it official, institutional and retail, to reinforce their efforts to diversify their asset away from USD. This provides a good opportunity for gold investment.

The deteriorating economic condition in the US will lead the Fed to delay its tightening schedule. While the market has been worrying about a default in US debt, any agreement in raising the debt ceiling and deficit cutting will only lift USD temporarily. Fiscal tightening may trigger the Fed to extend and expand monetary easing to stimulate the economy. Even if there's no QE3, the Fed funds rate will stay at exceptionally low level for a longer period than previously expected. As long as interest rates remain low, we believe gold will surprise to the upside.

Gold is also appealing as it protects investors during periods of inflation and deflation. Elevating inflation pressure is what the global economy is experiencing. In China, CPI jumped at the fastest pace in 3 year to +6.4% y/y in June from 5.5% y/y in May. Australia's latest report shows that headline CPI eased to +0.9% q/q% in 2Q11 from +1.6% a quarter. The moderation was not as much as expected. On annual basis, inflation rose to +3.6%, up from +3.3% in 1Q11. New Zealand's inflation has continued to overshoot the central bank's 1-3% target. In the US, core inflation was strong although headline CPI unexpectedly declined in June. The rise in global inflation should lead to the rise in gold demand.

source:Baker Hughes

USDJPY falls to 77.00 level on weaker US Data

The USDJPY moved sharply lower on the weaker US data today in addition to Washington budget issues. The price has found support against the 77.00 level with trendline just below this key level at 76.96.  The low in March came in at the 76.41 area in fast market conditions. At the time, the market was reeling from the “idea” that Japan exporters would need to repatriate funds back to Japan (selling dollars, buying yen in the process).   In March to stop the fall, global central banks came into the market and sold Yen (bought USDJPY).   The hardship on the country from the devastation of the Tsunami and nuclear disaster warranted the concerted effort. I do not think that concerted effort will be found now.  Today, the dynamics are different with the dollar weakness dominating.

The price bottom at 77.00 is a logical level to pause.  Traders will be eyeing the correction – marking the 38.2% of the move down at 77.255 as a level to get above that would take some of the sting of the decline away from the sellers today.   Failure to move above this level keeps the pressure on the pair.  Keep an eye on the level.

Weekly Commodity Update : Commodities nervously awaiting Capitol Hill decision

The standoff continues between President Obama and the Republican led Congress over a deal to raise the debt ceiling. If they, beggaring belief, fail to reach an agreement to raise the government’s borrowing limit, the major ratings agencies have said they could downgrade the AAA credit rating that the U.S. currently holds. Such a move could raise the cost of borrowing and slow an already fragile economic recovery, highlighted by nasty U.S. growth data, and thereby reduce demand for energy by the world’s largest consumers.

A failure would trigger a spike in volatility and disrupt financial markets. These concerns were raised by fourteen of Wall Street’s leading CEO’s on Thursday who wrote to President Obama and Congress warning them of “very grave” consequences of a default and urging them to sort out a deal.

Meanwhile in Europe fiscal worries continue as the market fears that the Greek disease could still spread despite politicians’ best efforts to prevent this. Italy auctioned bonds this week at a very high cost and has seen its spread over German bonds rise above levels seen prior to the agreed Eurozone bail-out plan for Greece. Added to this, ratings agency Moody’s warned about a possible downgrade of Spain’s credit rating.

A month of two halves for commodity performance
Commodities spent the first half of July recovering strongly from the sell off that occurred during May and June. The last half however has been overshadowed by macro-economic concerns with the above mentioned fiscal worries in the U.S. and Europe having caused markets to trade sideways apart from safe haven investments such as gold and silver. As a consequence the Reuters Jefferies CRB index showed the first, but relative small, positive monthly return since April. 

U.S. oil demand reduced
The price of WTI crude briefly traded above 100 dollars before being knocked down with further losses following a surprisingly high increase in U.S. oil inventories. Imports of crude and gasoline into the U.S. appear to have fallen to the lowest levels in years, according to the Lloyd’s list. Whether this is a signal that demand is waning or it is caused by the release of 30 million barrels from its strategic reserves remains to be seen. The Energy Department has just begun delivering this oil with less than one third hitting the market in July and the remainder during expected during August.

WTI crude remains stuck in its July range between 94 and 100 dollars as macro economic developments either side of the Atlantic continues to be the main focal point. In Brent crude the trading remains confided to the 115 to 120 dollar range for now. The spread between the two varieties has moved back above 20 dollars following an injection of 430,000 barrels into Cushing, the delivery hub for WTI crude.

Impacts from hurricane season
The first four tropical storms of this year’s hurricane season so far have highlighted the risk to production and refineries in and along the Mexican Gulf. This week the price of Gulf of Mexico crude called Louisiana Light Sweet rose to a premium of nearly 22 dollars over WTI crude as tropical storm Don entered the Gulf carrying winds that forced companies to evacuate staff from oil rigs and temporarily shut down production.

The US National Oceanic and Atmospheric Administration NOAA have predicted 3-6 major hurricane storms this coming season. In order to cause any disruption they first of all have to come to fruition and secondly have to hit the Gulf leaving enough unknowns for the market to avoid pricing in the potential risk. Natural gas which in previous years use to see increased volatility shrugged off the news about Don and dropped 4% on the week as traders scaled back positions on the back of higher than expected weekly storage data.

Tricky week ahead for precious metals
Gold extended its recent gains and spent the week consolidating above USD 1,600. Silver meanwhile has been struggling to get a foothold above 40 dollars and has underperformed on a relative basis. Being one of the top performers during July investors have been taking some profits as the May sell-off is holding back investors from building up large scale positions similar to ones seen during the first quarter of 2011.

Gold and silver will be facing a tricky week with pressure mounting for some kind of result from the U.S. debt ceiling negotiations. Short term a satisfactory outcome could remove some of the recent support, especially considering the chance of the dollar strengthening as a consequence. Should gold manage to break below USD 1,600 it could trigger a move towards the next support which can be found in a band between USD 1,555 and 1,575.
 

Agricultural markets also had a quiet week continuing a sideways trading pattern while waiting for further clues about the potential size of the upcoming harvest. The adverse weather which had been supporting prices up to now seems to have normalised with rain across dry areas helping crops prosper.  

Another step towards Crisis 2.0?

We remain with the risk-off scenario. The US economy is clearly heading for zero growth again and the EU’s is showing no ability to create a credible debt-crisis resolution. There are two major premises in politics it seems: Buy time and spend yourself out of trouble. Over the last 24 hours I have a few conservations with fund managers and two important points crystallized from my discussions with them:

The Keynesian endpoint
Since the crisis hit in 2008, world policy makers have basically operated on the idea that creating more debt could create more growth – the basic tenet of classic Keynesian policy.  I am increasingly convinced that we are reaching what some have dubbed the “Keynesian endpoint”, where the failure of this Keynesian approach to turn the economic ship yields to a more balanced approach to monetary- and fiscal policies (rather than bail everything out all the time). This turn will occur not because it makes sense, but because circumstances simply leave no alternative.

Time is up
The second point is the increased likelihood that “time is up”. This idea came from my friend and hedge fund manager Dan Arbess of Xerion Capital : “Here's the thing.  Every politician likes to spend, that's how they get elected.  Republicans don't like taxes, but boy can they borrow.  That game is ending so now, there are no more options for spending without taxing. It's going to get interesting with two totally different worldviews: Democrats tax and spend, Republicans cut taxes and spend...Democrats tend to think government is the solution, Republicans think it's the problem”. Well put and time is up for the US spending juggernaut, regardless of how it will be stopped.

If we look at key indicators for the EU and the US there is increasingly clear evidence, to which the market has been paying insufficient attention , that time is indeed up and the alarm bells are ringing:

Chart 1: Contagion is on. Spain minus Italy 10 year bond spread

 Source: Bloomberg

This chart may be the most important one for understanding the gradual erosion in the EU and the Euro – namely the spread in 10 year bonds between Spain and Italy. Less than three months ago, the inclusion of Italy in the group of nations affected by the sovereign debt crisis was borderline anathema for EU politicians. Now fast forward and we have this spread down at 18 bps – yes, Italy, deemed outside the circle of contagion, now yields almost as much as Spain.

And while we’re on the subject of Spain, a few items crossing the screen  - all of them today:

• Zapatero calls early Spanish election
• Spain faces Moody’s downgrade risk on regional budget concern
• Talks of EFSF fund not being big enough (still at old level of 440 bln. EUR) is hurting Spanish debt

Again, I made this point several times: The real risk to Italy, Belgium, Spain, Denmark and other countries remains their internal domestic economic- and political agenda: zero growth means by definition that the debt burden will increase when you are running a budget deficit. This you can live with in transition periods, but we are well into the 10th year of below long-term trend growth and in many countries barely even making it to positive growth. There is a price for this: downgrades, increased yields to finance the debt and a desperate need to keep a primary balance at zero or positive (the budget deficit before interest expenses = primary deficit).

In the US – deal or no deal – I am sorry to say it makes no real big difference. The budget plans for the next ten years that have been thrown around, whether intended to save $1 trillion, $2 trillion, or even $4 trillion are insufficient to counter the “baseline scenario” of $10 trillion of further national debt accumulation that will take place assuming no behavior change. And that $10 trillion projection is modest, since it would take place in a scenario of 4% growth. What if growth is 1-2% or worse? When looking at US dollar it is important to choose the right currency. The only fair one is CHF – it’s in Europe, has a small open economy, world class companies, and has reasonable taxes. The chart below is one of the USD vs CHF since 1991. The trend? CHF has increased on average roughly 3 per cent per year in the last decade.

Chart 2- The US dollar vs. CHF tells the story of fiat money

 Source: Bloomberg

The next few days are important as political events, but the most likely long-term impact is…surprise, surprise: more of the same:

The US dollar will continue to weaken 3-5% per year, the politicians will buy some time into the next election cycle, yields will creep higher and higher for non-core countries, equities will be over-bid relative to bonds as investors are losing faith in governments, and the disparity between the rich and poor will only yawn wider as the latter suffer on the inevitable standard of living declines that are forced upon them by wages that fail to keep pace with cost of living increases.

We have dealt with bigger crises than this before – you only need to go back to your own grandparents – they lived through wars, booms and a depression, and still created wealth beyond anyone’s dream. The big difference? They grew up respecting and expecting hard times, hard work and each other. Today we all want to believe that the last thirty years will be extended by another five to ten years before we start the rebuilding. We are now definitely in Crisis 2.0 early stages, I constantly meet clients and investors who keep complaining I’m too negative – but am I really negative, or am I merely trying to make you aware that the light at the end of the tunnel is not the exit but an approaching freight train? I hope I am wrong. I really do (and I often am) but a touch more reality would help us all.

Daily Report: Greenback Weakens as Vote on a Republican Proposal to Raise U.S. Debt Limit Postponed

Despite trading narrowly earlier today and in overnight session, the greenback slipped again after the news that the voting by the U.S. House of Representatives will be postponed, the obvious reason behind the delay is the Republican do not have enough vote to pass the measure so they wanted to squeeze more time to convince other party members. Nevertheless, Democrats in Senate are still strongly against the measures which they considered only a short-term solution. The greenback fell to another 4-month low against the Japanese yen to 77.45, verbal intervention by Japanese officials seemed not working with Chief Cabinet Secretary Yukio Edano saying the government will closely watch moves on the FX market and Finance Minister Noda said intervention has some positive effect and decisive action will be taken to deal with excessive volatility but not to keep the yen in specific level. Option barrier at 77.50 was finally cleared and stops below 77.40 are in focus with more barriers seen at 77.25, 77.00 and further out at 76.00 (large). On the upside, offers are lined up from 77.80 up to 78.00 with stops only emerging above 78.20 and 78.55/60.

Although the single currency also rebounded this morning after the delay of voting in U.S. House due to lack of support, eurozone still have problem of its own on spreading debt crisis, concerns over the second Greek bailout package may not be enough to stop the contagion of debt crisis were reflected on surging Italian bond yields. Another euro negative news is that rating agency Moody's placed Spain's AA2 ratings under credit watch for a potential downgrade due to increasing vulnerability of its government finances and the risk of a sustained rise in funding costs on the back of rising bond yields. U.S. names were seen buying euro earlier below 1.4300 and stops at 1.4350 were triggered, offers from Asian names are reported at 1.4365/70 and further out at 1.4390-00 with next batch of stops located at 1.4410. On the downside, bids from Asian CBs and sovereign names are still seen at 1.4280 and 1.4250-60 with stops placed below 1.4250 and 1.4220. German retail sales came in better-than-expected at 6.3% versus forecast of 1.7% and previous figure was revised up from -2.8 to -2.5%, little reaction so far as focus remains on debt crisis spreading problem.

Cable also retreated quite sharply from overnight high of 1.6383 to an intra-day low of 1.6323, although sterling bounced briefly as Rep Kevin McCarthy announced that vote will be postponed, the pound slipped again even with the release of slightly better-than-expected UK Nationwide house price data (0.2% vs forecast of -0.1%). More UK data are scheduled including June mortgage approval and money supply at 08:30GMT. At the moment, offers are reported at 1.6360-70 with some stops placed above 1.6385/90 but bigger offers (option-related) are tipped at 1.6400-10. On the downside, mixture of bids and stops remains at 1.6290-00 and further out at 1.6250-60.

Elsewhere, the Australian dollar extended yesterday's retreat after faltering below this week's record high of 1.1081 in part due to weekend profit-taking, however, demand from real money accounts should emerge around 1.0950 and more at 1.0900/10. On the upside, offers are lowered and lined up from 1.1000 up to 1.1050 and 1.1090-00.

AUD/USD Daily Outlook

Daily Pivots: (S1) 1.0960; (P) 1.1018; (R1) 1.1059; 

The break of 1.0968 minor support suggests that a temporary top is formed at 1.1079. Intraday bias is turned neutral and some consolidations could be seen first. But downside is expected to be contained 4 hours 55 EMA (now at 1.0879) and bring another rise. Above 1.1079 will target 61.8% projection of 0.9703 to 1.1011 at 1.0390 at 1.1198 next. In any case, we'll stay bullish as long as 1.0789 resistance turned support holds.

In the bigger picture, rise from 0.8066 is part of the up trend from 2008 low of 0.6008 and is still in healthy status. Such up trend should now target 100% projection of 0.6008 to 0.9404 from 0.8066 at 1.1462. On the downside, Break of 1.0390 support is needed to be the first signal of medium term reversal. Or we'll stay bullish in AUD/USD.

Still waiting on debt ceiling decision; Eurozone problems persist

Well shock horror, the U.S. debt ceiling vote/decision was delayed once again and is postponed until today… maybe…

Understandably the USD was sold off on the news (although possibly not as much as most would have expected) and the U.S. equity market took a small beating, leading Asia into a similar quarry. With regards to the S&P500 as long as we continue to sit above the 1285 level (tested or otherwise) the overall scenario still looks constructive, and simply intimates nothing more than profit taking and consolidation. Below that 1285, the door opens for a nice clean out of stops having built up and the road is freshly paved for a legitimate test of the 1250 major support.

Meanwhile (as I’ve noted now for a couple of days), the European problem hasn’t exactly just disappeared… The peripheral spreads keep blowing out, with Italy leading the charge over the last two days. Fear of contagion is still rife in the air and just because some stuffy highly overpaid people got together last week in Brussels and seemingly came to a conclusion, doesn’t mean that we’re out of the woods just yet. As noted individual ratification is still required and we all know how much of a headache that can prove to be…  Needless to say this will keep the EUR under pressure and in the direct cross the U.S. woes won’t be as heavily felt…
On the day we have a relatively heavy data slate which includes, U.K. housing data, CAD GDP, U.S. advanced GDP as well as the Chicago PMI figures. Truthfully though little if anything will really come of these numbers until this evening after the U.S. close when the vote is now scheduled to occur…

On the crosses, yesterday proved to be a profitable day for those that got on the back of my EURUSD call, as it almost traded word for word, pip for pip as outlined in this piece yesterday. Having said that we still trade heavy in the cross and for the time being sit on pivot/support levels at 1.4250. My preference is not to get involved today, but the gun to head trade would be a wait and see, looking to fade any rallies above the 1.4300 handle… But don’t!

The AUDJPY is looking constructive for those that didn’t wait (like I did for the right level) and just blindly sold, helped even further by a tier 1 name coming out calling for the cross to be trading closer to fair value at 82.00. Nonetheless, I’m not a seller here and still prefer to wait for another blip before I get involved.

The AUDUSD has retreated somewhat, but is simply consolidation it’s outrageous move over the last few days. Stops under the 1.0980 level got taken and save for the clean out, price action still looks constructive for another attempt to the upside.
The Cable remains a USD story and should be played that way, but on a Friday, why would you bother…

My GBPCAD however remains well bid and overnight touched the 1.5550 target I had in mind. I’m not ready to dump it just yet, either to close my long or reverse my sentiment, I still think there’s a couple of upside attempts left in this old dog yet.

EURJPY is still floundering lower and now looks for 109.50/80 as the target on the downside, if you’re not already short, don’t get involved now as you’ll get cut up chasing an irrational EUR.
Good luck and please, please don’t ruin your Friday with a rubbish punt.

EUR/USD: Trading the US GDP Release

The broadest measure of the economy always rocks the markets, especially in the first release; Another quarter of weak growth is expected in the world's largest economy; Here are the details for this all-important release, and 5 possible scenarios for EUR/USD, a pair busy in an "ugly contest".

Indicator Background

Gross Domestic Product is the widest measure of the economy, published in a low, quarterly frequency. There are two revisions to this upcoming first release, but in most cases, the changes are minor. The publication on Friday as the last significant event of the week, also adds to the importance.

Q4 of 2010 saw meaningful growth in the US: 3.1% (annualized). This was seen in significant gains in employment in Q1 of 2011, but GDP growth was already much weaker: 1.9%. Such weak growth means that the economy is almost stagnating - this isn't enough to create many jobs.
In the second quarter of 2011, the situation wasn't much better. Employment indicators such as the Non-Farm Payrolls, and also manufacturing and services indicators, showed limited growth.
This makes expectations very modest now: only 1.6% growth in Q2. Low expectations can turn into a positive surprise rather easily, but if even these low expectations aren't met, the dollar awaits a sell off.
Sentiment and technical levels
The debt crisis in Europe didn't go anywhere. It just took a break after the European summit. But now, old and new fears are fully back. In the US, the situation isn't much better. At the time of writing, the uncertainty around raising the debt ceiling remain. While many solutions are explored, even a delay in the "drop dead date" of August 2nd probably won't provide the necessary rally for the greenback. So, both currencies are locked in an "ugly contest" for now and the sentiment is balanced.
Technical levels from top to bottom: 1.4882, 1.4775, 1.47, 1.4650, 1.4550, 1.4450, 1.4375, 1.4325, 1.4282, 1.42, 1.4160 and 1.41.
5 Scenarios

1. Within expectations: +1.5% to +1.9%: No surprises and a similar outcome as Q1's figure means that the pair will shake in both directions, but will likely stay within range.
2. Above expectations: +2% to +2.6%: Better than expected growth can send EUR/USD lower, with a nice chance of breaking support.
3. Well above expectations: +2.7% or more: A return to meaningful growth doesn't seem likely. Such a huge surprise can send the pair below two resistance levels, and providing long term hope.
4. Below expectations: +1% to +1.4%: Going under the low expectations cannot be ruled out. This will probably lift euro/dollar higher, above resistance.
5. Well below expectations: +0.9% or lower. This virtually nonexistent growth and fears of a double dip recession will raise the chances of QE3 and will send the pair higher, with a break of two levels likely.

For more on EUR/USD, see the euro to dollar forecast.

A U.S. Downgrade, the Worst Case Scenario

With only a handful of days left until the August 2^nd deadline, investors are appropriately worried about two things: the debt ceiling debacle and the threat of a ratings downgrade. Most analysts don’t believe that American politicians will (grand) stand in the way of doing the right thing in the short term, i.e. getting the debt ceiling raised, thus avoiding a debt default. Some bookmakers believe that there’s a near zero chance that a default is imminent, but even if it occurs, most analysts agree that at worst it will last for a day or so.

On the other hand, it’s about even money for a ratings downgrade, and the repercussions of that will be much longer lasting. Certainly, analysts are exceedingly concerned that U.S. lawmakers won’t act appropriately in the medium to long term and take a serious whack at fiscal reform. According to Michael McKenzie, the Financial Times’ U.S. market correspondent, U.S. politicians will probably use slight of hand to get a deal cut to raise the debt ceiling, but if it isn’t accompanied by fundamental reform, a downgrade is likely.

Most analysts agree that if Moody’s, S&P or Fitch ratings downgrade is forthcoming it will be that – the absence of fundamental fiscal reform – which will be the reason for it, not the missing of the debt deadline, as irresponsible as that would be.

And a ratings downgrade would have immediate and immeasurable effects. Basically, if the U.S.’s rating is notched down to AA, then everything below that rating also gets notched down. And anything backed by U.S. Treasuries – like the FDIC, Fannie Mae, Freddie Mac, etc., all of those get downgraded, too.

But it’s not just government-sponsored entities, it’s also global governments, central banks, domestic banks, insurance companies, pension funds, mutual funds, individual investors – it’s any entity that holds U.S. assets which will suffer from the downgrade.  The dominoes would begin to topple, one by one, as all of those entities scramble to shore up their now diminished holdings.  Michael McKenzie likens it to the financial crisis of 2008; as he puts it, “the deleveraging event would ripple out across the financial markets.”

A debt default would be embarrassingly painful, but the pain would be short-lived. The aftermath of a ratings downgrade, however, would be even more painful, more wide-spread, and much more enduring.

Euro crumbles again – EURJPY punished for steep losses

The Euro continues to struggle for support as Euro Zone sovereign debt spreads for Italy and Spain continue to ratchet wider. Meanwhile, headline risks looms in the background on the US debt ceiling.

Risk was off steeply late yesterday in the US session, helping to boost the USD in some of the crosses, though the generally pro-risk/commodity currencies have withstood the pressure fairly well in today’s trade, such that the USD is only appreciably higher against the mightily struggling Euro, where spreads continue to ratchet wider on the likes of Spanish and Italian debt.

Klaus Regling, the head of the EFSF bailout facility, said today that the EFSF won’t be employed unless the ECB and EU member states agree. This would mean a cumbersome process for damping the risks of debt spread contagion, one would think, and dims the prospect of the EFSF serving as a kind of “back door” to a tighter EU fiscal union. Again, the celebration of last week’s bailout was clearly premature.

Chart: EURUSD
EURUSD drooped to a key support area around 1.4270/80 (area slightly above there was quite important too, as the steep rising line of consolidation – shown in blue – was taken out above 1.4300, and we also had the 55-day moving average). 1.4270/80 is where we have the previous high and the 0.382 Fibo retracement levels. The pair needs to find support in this pivot zone it would seem, if it wants to keep the focus on the higher end of the range. If it fails to garner support, the 1.4100 area might be the next focus.

Odds and ends
The RBNZ managed to tack on another few bps of policy tightening on top of already high expectations that the bank is gearing up to hike interest rates in the near future. Governor Bollard said that as long as “global financial risks recede” (a very important caveat – we’re seeing more waxing rather than waning globally, even if local conditions in NZ have been quite strong), he saw “little need for the March insurance cut to remain in place much longer.” While it’s undeniable that carry considerations have operated in favor of the kiwi on the back of this statement, it remains tough for us to see much additional upside for the currency broadly speaking if the mood surrounding risk appetite remains sour.

US weekly jobless claims finally notched a reading below 400k for the first time in months, though that reading will inevitably be adjusted higher  - likely to above the 400k mark – next week. Still, the data point is encouraging for the view that the recent uptick in claims is fading again.

As the Euro struggles, crude oil prices have remained relatively stable and the NOK has as well, with EURNOK once again threatening the massive 7.70 area that has held it since time immemorial (only one three-week bout of activity below that level since 2003). Certainly from a sovereign stability angle, the NOK remains attractive – but that currency has tended to trade in positive correlation with economic growth in its more recent history. It’s a conundrum for EURNOK traders – which horse is NOK riding on, or is it trying to ride on both at the same time. The action for the last several months has been totally inconclusive.


Looking ahead
The market picture is rather confused, to say the least, as there is no real apparent safe haven in this market – a theme we have touched on a bit lately as have other commentators. Have a look over at FTAlphaville’s blog entry on Rochdale analyst Dick Bove’s assertion that the markets need a new safe haven – and can’t find one – a very interesting read and reflects the market’s dilemma here.

There are more maneuverings going on in Washington today, with the Senate and House each voting on their own versions of bills aimed at limiting debt and lifting the debt ceiling. Boehner’s version appears dead on arrival and would be vetoed by Obama anyway. And the Senate’s Reid’s bill may not pass muster if it is put up for a vote in the House. Are we going to have to test whether the US government can continue to function normally beyond the August 2 deadline? The uncertainty here is thick.

Perhaps the most remarkable aspect of the debt ceiling debate is that there has been no proposal forwarded by either party that takes an appreciable bite out of the size of the deficit. The yearly deficit shortfall is on the order of $1.5 trillion or more yearly, and the supposedly fiscally conservative Republicans want to cut less than a trillion over ten years, with most cuts coming from projections for better economic growth?

Watch out for the heavy load of Japanese data up in the Asian session tonight, though the market doesn’t generally react much to Japan’s economic numbers – it’s usually a yield focus for the JPY. On that front, yesterday’s 5-year went off relatively orderly, though foreign participation dropped (wonder why) and the market generally judged it poorer than hoped, sending yields briefly higher and the JPY lower for a time. But the bond market has recovered again into today and the JPY is stronger again, with EURJPY pressing down toward the key 110 area. Today we have a 7-year auction, with results (if all goes as normal) published around 1700 GMT.


Economic Data Highlights

• New Zealand RBNZ left cash target unchanged at 2.50% as expected
• Japan Jun. Retail Trade rose +2.9% MoM and +1.1% YoY vs. +1.5%/-0.5% expected, respectively and -1.3% YoY in May
• Sweden Q2 Manufacturing Confidence out at 0 vs. 7 expected and 6 in Q1
• Sweden Jul. Consumer Confidence out at 12 vs. 15.5 expected and 16.7 in Jun.
• Sweden Jul. Economic Tendency Survey out at 104.4 vs. 109.2 expected and 109.9 in Jun.
• Sweden Jun. Retail Sales rose +3.1% MoM and +3.4% YoY vs. +0.7%/+0.9% expected, respectively and vs. -0.9% YoY in May
• Sweden Jun. Unemployment Rate out at 8.8% vs. 8.6% expected and 7.9% in May
• Germany Jul. Unemployment Change fell -11k vs.-15k expected and -8k in Jun.
• Germany Jul. Unemployment Rate out at 7.0% as expected
• EuroZone Business Climate Indicator out at 0.45 vs. 0.83 expected and 0.95 in Jun.
• EuroZone Jul. Economic Confidence out at 103.2 vs. 104 expected and 105.4 in Jun.
• EuroZone Jul. Industrial Confidence out at 1.1 vs. 1.6 expected and 3.5 in Jun.
• EuroZone Jul. Services Confidence out at 7.9 vs. 9.2 expected and 10.1 in Jun.
• UK Jul. CBI Reported Sales out at -5 vs. +2 expected and -2 in Jun.
• US Weekly Initial Jobless Claims out at 398k vs. 415k expected and 422k last week
• US Weekly Continuing Claims out at 3703k vs. 3700k expected and 3720k last week

Upcoming Economic Calendar Highlights (all times GMT)

• US Weekly Bloomberg Consumer Comfort Survey (1345)
• US Jun. Pending Home Sales (1400)
• US Fed’s Lacker to Speak (1645)
• US Fed’s Williams to Speak (1830)
• New Zealand Jun. Building Permits (2245)
• UK Jul. GfK Consumer Confidence Survey (2301)
• Japan Jul. Markit/JMMA Manufacturing PMI (2315)
• Japan Jun. Overall Household Spending (2330)
• Japan Jun. Jobless Rate (2330)
• Japan Jun. National CPI (2330)
• Japan Jun. Industrial Production (2350)
• Australia Jun. RPData-Riskmark House Price Index (0030)
• China Jul. MNI Business Condition Survey (0135)
• Japan Jun. Construction Orders and Housing Starts (0500)

Daily Report: Euro off from 4-Week High on Renewed Worries Over Eurozone Debt Crisis Contagion

The single currency has remained under pressure after yesterday's sharp retreat on renewed worries over eurozone debt crisis contagion, euro traded off over 1-month high of 1.4537 after rating agency Standard & Poor's said Greece will partially default on its debt once EU officials finish implementing the second Greek bailout plan agreed last week, S&P also downgraded Greece rating from CCC to CC (junk status) with negative outlook. Comments from German Finance Minister Schaeuble also put euro on the defensive side as he warned in the newspapers that the eurozone debt crisis wasn't over yet and Greece will need a decade to get its competitiveness back to normal, he was against providing a ‘blank check' for the EU rescue fund (EFSF) to buy bonds of troubled countries in the secondary market, Italian bonds and stocks fell sharply again on revived concerns on spreading debt crisis. EUR/USD is trading well below 1.4400 and offers from U.S. investment houses are reported at 1.4380-1.4400 and further out at 1.4450 with stops placed above the latter level and 1.4500. On the downside, bids from European names are noted at 1.4330-40 to protect stops below 1.4320, some traders are watching a break of 1.4300 where more stops are located. A series of economic releases are scheduled today including German unemployment data (07:55GMT) and eurozone confidence index (09:00GMT).

Despite rebounding from a 4-month low of 77.57 to 78.17 yesterday on short-covering, the greenback slipped again versus the Japanese yen on broad-based rebounded in the Japanese currency after Jiji Press reported that Japan Economic Minister Kaoru Yosano is closely watching the development of U.S. debt talk and he will wait for the outcome before deciding on intervention, he also said while meeting Aichi Prefecture governor Omura (who believed to have requested the government to take action to stop yen's strength) that intervention as big as 1-2 trillion yen would be quite difficult. Stops are still noted below 77.50 barrier and more option triggers are located at 77.25 and 77.00 (large) whilst offers remain from 78.00 up to 78.20 with some stops placed above 78.30 but mixture of offers and stops is still seen at 78.70-80.

The British pound traded narrowly after yesterday's euro-led retreat from 6-week high of 1.6440, due to lack of fresh stimulus and economic release (only CBI reported sales at 10:00GMT), further sideways trading would take place. We heard some bids around 1.6300-10 for protection of stops below 1.6300 but sizeable stops are parked below 1.6250 with more buying interest expected to appear above this level.

In Swissy, the pair is still trading near record low of 0.7996 formed earlier this week on safe-haven flows, however, bids to protect 0.7990 option barrier are still protecting dollar's downside, more option barriers are tipped at 0.7950, 0.7900 and further out at 0.7850. Sell orders from various parties are lined up from 0.8040 up to 0.8060 with some stops seen at 0.8080 but more selling interest should emerge around 0.8100.

Elsewhere, Reserve Bank of New Zealand left interest rates unchanged at 2.5% as widely expected and the accompany statement said there is no need to keep current rates much longer, market interpreted the remark as the central bank may raise rates as early as September with room for a 50 basis points hike. 

EUR/JPY Daily Outlook

Daily Pivots: (S1) 111.57; (P) 112.39; (R1) 112.85; 

EUR/JPY dips to as low as 111.53 so far today but with 111.45 minor support intact, intraday bias remains neutral. Price actions from 109.57 is treated as consolidations in recent decline only and upside is still expected to be limited by 113.49 resistance. on the downside, below 111.45 minor support will flip bias back to the downside for 109.57 first. Break will target 100% projection of 123.31 to 113.41 from 117.74 at 107.84 next. Also, note that break of 113.41/117.74 resistance is needed to confirm reversal or we'll stay cautiously bearish.

In the bigger picture, current development suggests that rebound from 105.42 medium term was merely a correction and has completed at 123.31 already. Whole down trend from 2008 high of 169.96 was not finished yet and is still target a new low below 105.42. Nevertheless, in that case, we'd start to look for reversal signal again around 100 psychological level unless weekly MACD would break it's up trend line.

Economic Indicators Update

GMT	Ccy	Events	Actual	Consensus	Previous	Revised
21:00	NZD	RBNZ Rate Decision	2.50%	2.50%	2.50%
23:50	JPY	Retail Trade Y/Y Jun	1.10%	-0.50%	-1.30%
7:55	EUR	German Unemployment Change Jul		-15K	-8K
7:55	EUR	German Unemployment Rate Jul		7.00%	7.00%
9:00	EUR	Eurozone Consumer Confidence Jul F		-11.4	-11.4
9:00	EUR	Eurozone Economic Confidence Jul		104	105.1
9:00	EUR	Eurozone Industrial Confidence Jul		1.6	3.2
9:00	EUR	Eurozone Services Confidence Jul		9.2	9.9
10:00	GBP	CBI Reported Sales Jul		2	-2
12:30	USD	Initial Jobless Claims		412K	418K
14:00	USD	Pending Home Sales M/M Jun		-2.00%	8.20%
14:30	USD	Natural Gas Storage		38B	60B

AUDUSD at record highs on 2Q Australian CPI data

The biggest mover and news overnight was the much better than expected Australian CPI data and thus in tandem the AUDUSD has hit record highs, roughly where it trades at the time of writing 1.1070 or thereabouts. The data came in much higher than expected not only on the q/q side but more importantly now on a y/r basis pushes the rate of inflation to the upper bounds of the Reserve Bank of Australia comfort zone. This clearly puts pay to any thoughts of rate cuts and for the time being leaves the potential for another hike on the table. If you cast your minds back there have been several instances whereby RBA speakers have intimated that before any move is made they will wait to see this data printed last night and thus react accordingly. While a stronger AUD is in some contributing to the overall inflationary picture, chatter on the news wires this morning has indicated that there will not be any intervention in the market, and quite frankly nor should there be. Fair to say then that a rate cut is off the table and now all eyes will be on the November RBA meeting, where if a move happens, it will likely be at that meeting.

Elsewhere, the AUD was not the only beneficiary of the continued USD weakness, the other cross painting most movement is the USDJPY which is now not far from the extreme reactionary low of 76.25 (March earthquake print). 

We’re set to continue to see more of the same as the suggested vote due to take place today has now been postponed till tomorrow, really cutting a fine line into the deadline set at August 2nd. With such uncertainty come new highs in Gold understandably and even more calls from various quarters for a return to the gold standard, and you know for the first time, I’m loathed to disagree… Bottom line: where is everyone keeping their money right now? Simple really, Gold, CHF and JPY… the other hidden safe haven is the CNY although you won’t hear too many shouting about it…

Other news overnight centered predominantly on political issues and while the U.S. debt ceiling debate remains at the forefront of headlines, people should still focus on the Eurozone, as the proposed package put forward last week, still needs to be ratifies by individual governments etc etc…

With regard to data on the day we have CHF KOF index, U.S. durable goods and later tonight the Reserve Bank of new Zealand rate decision. The last point will be of interest as given the lofty heights to which the NZD has climbed we had an almost incredulous headline last night stating that the NZD is now becoming a safe haven destination… Without resorting to blasphemy , I’m not entirely sure how to express my amazement at the stupidity of this statement and scenario…

On the majors, directionally difficult to play in thin markets, but nonetheless here’s what I’m seeing;

EURUSD: Still looks bid on the back of USD weakness, but will likely struggle above the 1.4550 level (good sized stops above), having said that though a dodgy false break will see us print 1.4570 before we retreat lower again. The downside should be supported with bids at 1.4430, small stops below and more bids into 1.4360/80.

GBPUSD: Still looks bright (again more of a USD play) and 1.6470 should keep us contained for the time being. The downside however begins to look interesting below 1.6330 (stops) and then legitimate support lies in the 1.6270/80 area.

USDJPY: Well you all know how I feel about the JPY, so for now 78.30/80 keeps the topside well capped.

AUDUSD: An initial consolidation should see us test 1.0980, but for now it’s no retreat, no surrender… Other downside levels to watch (although not today) are 1.0830/1.0780.

USDCAD: Looks like a slightly healthier buy into 0.9390/80, but the topside will be seriously limited into 0.9470.

EURGBP: Trapped! That is all… Levels to keep an eye on are 0.8775 and 0.8850, although the latter is unlikely on the day…

EURJPY: As mentioned all along, the failure to close last week above the 114 level, paints the picture for more downside and rallies into 113.30/50 can be faded looking for a return into 111.60 and lower over the coming days.

Daily Report: Aussie Surges above 1.1012 on Strong Inflation Data whilst the Buck Remains Weak Broadly

The Australian dollar took the center stage this morning as aussie surged above previous high of 1.1012 to a fresh 29-year high of 1.1063 after the release of higher-than-expected Australian inflation data, Q2 CPI came in at 0.9% q/q and 3.6% y/y versus the forecast of 0.7% y/y and 3.4% y/y respectively, closely watched trimmed mean and weighted median numbers from RBA were also higher than market consensus. Traders were selling the greenback across the board anyway and aussie became an obvious choice, with the figure came in well above the inflation target of Reserve Bank of Australia, economists see the central bank may not cut rates as early as previously anticipated. Some offers at 1.1050 were absorbed but more offers from big Australian names are reported at 1.1080 and 1.1100 with bids from various parties tipped at 1.1000-10 and also 1.0950 with stops building up below 1.0950 and 1.0930.

As there wasn't any solid progress in the debt negotiations between the Democratic and Republican leaders, the greenback remained sold everywhere, kiwi rose to a record high of 0.8765, euro extended gain to 3-week high of 1.4537, cable edged higher to an over 1-month high of 1.6440 and yen rose again this morning to a 4-month high against the greenback at 77.70. Traders paid little attention to comments from BOJ's Kamezaki who warned that there are strong uncertainties for the global economic outlook, he is very worried that firms are shifting abroad and power shortages together with the yen rise could worsen current situation. The committee member reiterated that the Bank of Japan is getting more and more wary about the yen's strength, however, his remarks did little help to the greenback the USD/JPY is still trading near the 4-month low. We heard quite a number of option barriers located in 77's, including 77.50, 77.30 and 77.00, there are also rumors of bids from Kampo and postal funds around 77.70-77.50 area. On the upside, offers are tipped at 78.00 with stops placed above 78.20 and then 78.50-60.

Although there were news that Standard & Poor's are considering to downgrade Greece credit ratings, little damage was done on the single currency as traders just see this as following what Moody's did earlier this week, euro are still trading with a firm undertone after testing an over 3-week high of 1.4537. At the moment, offers are noted from 1.4530 up to 1.4550 but buying interests from Asian CBs are lined up at1.4480-90 with some stops below 1.4480 and mixture of bids and stops is located at 1.4440-50.

The British pound eased a little bid after yesterday's rally caused by the release of not as bad as expected UK GDP data, no major economic data is scheduled today, with only the CBI Trends total orders of July at 10:00GMT. Order books are relatively thin with some offers reported at 1.6450 and 1.6500 whilst bids are tipped from 1.6380 down to 1.6350 with stops placed below the latter level.

Swissy re-visited 0.8000 level today on safe-haven flows after hitting record high of 0.7997 against the greenback, stops below 0.7990 are now in focus, however, option defensive bids are seen at 0.7960-70 with more stops planted below 0.7950. On the upside, offers are located at 0.8030-50 area with stops remain above 0.8080 and 0.8140-50, some traders are awaiting the release of Swiss KOF leading indicators at 09:30GMT.

AUD/USD Daily Outlook

Daily Pivots: (S1) 1.0861; (P) 1.0915; (R1) 1.1009; 

AUD/USD jumps to as high as 1.1062, making a new record. The break of 1.1011 resistance confirms up trend resumption. Intraday bias remains on the upside and further rise should be seen to 61.8% projection 0.9703 to 1.1011 at 1.0390 at 1.1198 next. On the downside, below 1.0933 minor support will turn bias neutral and bring consolidations. But retreat should be contained above 1.0789 resistance turned support and bring rally resumption.

In the bigger picture, rise from 0.8066 is part of the up trend from 2008 low of 0.6008 and is still in healthy status. Such up trend should now target 100% projection of 0.6008 to 0.9404 from 0.8066 at 1.1462. On the downside, Break of 1.0390 support is needed to be the first signal of medium term reversal. Or we'll stay bullish in AUD/USD.

The Dollar, Gold and the Quality of Money

www.forbes.com

Is gold money?

That question, directed to Federal Reserve Chairman Ben Bernanke by Congressman Ron Paul in last week's hearings before the House Financial Services Committee, strikes terror in the heart of all central bankers.

Bernanke looked stunned and then answered, "No: Gold is an asset."

The rising price of gold reflects global uncertainties, he explained. "The reason that people hold gold is as a protection against what we call tail risks: really, really bad outcomes."

The daily headlines report those potential risks: governments needing bailouts, from Greece to Harrisburg, Pennsylvania; the possibility that the euro will splinter; runaway deficit spending in the U.S.

With every headline, it is becoming increasingly apparent how much the governing class has overreached. Those who believe in government are simply running out of other people's money. For example, President Obama's call to reverse the tax break given to owners of corporate jets in his 2009 stimulus bill would supposedly raise $300 million a year in revenue, enough to cover less than two hours of current deficit spending. Even if the Federal government could tax 100% of personal income in excess of $250,000 a year, it would collect little more than half of the revenue needed to balance the budget.

These real world results mock the conventional wisdom that given the power to spend, borrow, tax and print money, elite public servants can manage the economy and protect the average individual against the vicissitudes of life. Instead, government itself has become a source of systemic risk, and a direct threat to our prosperity and liberty.

At the center of this political upheaval is the quality of money itself. "Is gold money?" is a show stopper because it raises the questions: "What is money and what power should government have to manipulate its value?

The answers to these questions reveal how our most basic trust in government has been betrayed.

When you or I accept dollars in exchange for providing goods and services, we do so trusting that when we spend those dollars, they will be accepted for an equivalent amount of goods and services. That's how money frees us from a barter economy.

Trust is always an assessment of some future action. Making a grounded assessment requires us to understand who is making the promise, what action they are promising, and whether they are sincere and competent to fulfill their promise.

When an individual, company or government has a good credit rating, we are saying that we trust they will keep their promise to pay off their debts in the future.

So it is with the value of money. Today Bernanke is making the promise effectively to "do his best" to achieve the Fed's dual mandate of achieving maximum employment and stable prices.

I do not doubt that Bernanke and his colleagues at the Fed have done their best. Here are the results:

• Three million fewer men and women are employed today than 2.5 years ago, when the Fed began an unprecedented era of monetary ease marked by zero interest rates and two rounds of massive, quantitative easing.
• The 12-month advance in the Consumer Price Index has been above 2% for the past five months, hitting 3.6% for the 12 months ending both May and June. Bernanke promised in his interview last December on 60 Minutes that the Fed "...would not allow inflation to rise about 2% or less." Yet the Fed has taken no action, nor articulated any policy change, that would fulfill his promise of price stability.

A poll conducted by Rasmussen last week indicates that the American people are losing trust in the Federal Reserve and in the future value of the dollar. Fifty percent of those polled reported they are "very concerned" about inflation, and 79% said they were at least "somewhat concerned."

Is gold money? Technically, no, in that gold does not circulate as a medium of exchange. But, as trust in the paper dollar continues to erode, and the incompetence of the governing class to manage the economy becomes more evident by the day, there is growing interest in and support of making the dollar as good as gold.

A gold standard works because the U.S. government rather than the Chairman of the Federal Reserve stands behind a promise that is explicit -- a dollar is worth a fixed weight of gold. This promise can be verified every minute of the day by observing the current rate of exchange between the dollar and gold, and, under a classical gold standard, by exchanging currency at a national bank for gold coins of a fixed weight and purity.

In addition, a gold standard provides a transparent set of practices to keep the promise. A rise in the price of gold signals too many dollars, triggering quantitative tightening. A fall in the price of gold signals too few dollars, triggering quantitative easing. Since these Fed actions are made daily and at the margin, such adjustments are not disruptive, but produce stability and trust.

Finally, a gold standard produces trust in the dollar because gold has the unique characteristic of maintaining its buying power over time. For example, if today's dollar were worth 1/35th of an ounce of gold as it was under the post World War II Bretton Woods system, a barrel of oil today would cost less than $3 a barrel, just as it did in the 1950s and 1960s.

Steps to restore gold's legitimate role as money are afoot. In Utah, gold and silver coins are now legal tender and exempt from sales and income taxes. The Swiss Parliament soon will hold hearings on creating a parallel, "gold franc." And, the central bank of Zimbabwe is considering replacing its worthless currency with a gold-backed Zimbabwe dollar.

The question: "Is gold money?" terrifies central bankers because it highlights their inability to provide a currency that is better than one whose quality is guaranteed by a fixed rate of exchange into gold. Between Aug. 15, 1971 -- the day President Richard Nixon suspended the promise that a dollar was worth 1/35th of an ounce of gold -- and Feb. 1, 2006 -- the day Bernanke was appointed Fed Chairman -- the dollar had fallen to 1/569th of an ounce of gold. Today, it is worth a teeny tiny 1/1600th of an ounce of gold.

An acceleration in the dollar's decline and the inflation, political and economic turmoil that would follow are among those "really really bad outcomes" that people are trying to escape. Restoring the promise that a dollar is worth a fixed weight of gold would guarantee its value and eliminate the "tail risk" of monetary disorder that individuals, businesses and government all over the world increasingly have reason to fear. The benefits of price stability, low and stable interest rates, an increase in high paying jobs and the spread of prosperity would redound to the benefit of all.