AUDUSD - Close to a Top

The AUDUSD daily chart produced a spinning top yesterday and the pair has since fulfilled the minimum requirement for trading over the top of wave A (17th August 1.0602).

However, the 1 hour chart shows no reversal patterns and the triangle breakout has not completed its target. A move up towards 1.0857 would complete the sequence. 

GBP/USD - Reversal today & risk aversion returns

Cable's recovery from the June low of 1.5785 looks tired and from both Elliott Wave and Classical TA perspectives; there is risk of a significant sell-off ahead.

Under Elliott Wave analysis, Cable is interpreted to be in the formative stages of a broad (c) Wave decline, wherein if Wave (c) equals (Fibonacci) 1.618 times the distance of Wave (a), then a sell-off toward the 1.5065 level can be expected over coming weeks.

Under Classical TA analysis, a potential Head & Shoulders structure has been forming since late July, with a sustained break below the 1.6210 support level completing this Reversal formation, to yield a minimum downside objective of 1.5785.

However, in the bigger picture there exists not only a much larger Head & Shoulders pattern dating back to November of last year (refer Weekly Chart below) but Cable is also entrenched within a multi-year Triangle structure for which over coming months the next Triangle support will be encountered at 1.5100 - 1.5000 (right within the vicinity of the Elliott Wave target above).

Furthermore, within this multi-year Triangle formation, Wave D will equal (Fibonacci) 60% of Wave B at 1.5060.

The Bottom Line

GBP/USD has likely completed three significant peaks this month; the first at 1.6745, the second at 1.6620 and the third at 1.6455 yesterday. This is probably setting-up a decline below 1.6210  toward the July low of 1.5785, initially. However, such a fall would probably be part of a much larger sell-off back toward the 1.5100/1.5050 area over coming weeks.

Heads up! Gold futures margin could be raised again

In a couple of moves the CME Group recently raised the margin for trading gold futures from 4,500 to 7,000 dollars. The move came as a response to increased volatility after an unprecedented strong rally during the last couple of months. The exchange is not trying to dictate the direction but in order to keep some integrity in the market they had to respond to the increased intraday volatility.

Have they done enough? Probably not, as volatility is still trading at almost twice the level compared with the first six months of 2011 and average daily price swings have continued to rise since the last margin increase  on August 24.

Gold margin as a  percentage of the contract value is still relatively low. Over the last two years margin requirements have hovered between 2.5% and 5.25% with 3.8% currently. 

As an example the equivalent for silver was more than doubled earlier this year 

How much:
Another rise could bring the margin up to somewhere between 8,200 and 9,000 dollars from the current level of 7,000 dollars representing an increase of between 17 and 28 percent.

Impact:
The previous two increases partly help to bring about the 200+ dollar correction and has so far not reduced intraday volatility.  Speculative involvement from hedge funds has been reduced over the last three weeks as margin increases make an impact on the position size they are allowed to hold.

With the increased potential for another round of stimulus from the Federal Reserve gold should be supported at this stage but as the recent correction highlights nothing ever goes in a straight line and discipline remains the key.

Daily Report: Euro Struggling to Extend Rally on Trichet, Kiwi Jumps Risk Appetite and Data

The risk on mode in financial markets continues as Asian equities are broadly higher following strong rally in US stocks overnight. New Zealand dollar leads the way after strong housing data which showed building permits jumped an impressive 13% mom in July. Australian and Canadian dollar closely follow. Swiss Franc continues to be the weakest currency as traders continue to reverse safe-have positions and on concern of more measures from SNB to curb franc strength, including the possibility of deposit charges. Dollar is soft in general but the loss against Euro and Sterling is so far limited and the dollar index is still holding above 73.42 near term support. Euro is still struggling to extend recent rally against dollar and sterling.

Euro bulls are somewhat disappointed by the soft comments from ECB Trichet. As he told in a testimony to the European Parliament, while inflation will likely remain above ECB's 2% target in near term, the bank is reviewing its medium term projections and outlook on inflation. Markets also noted that Trichet has dropped the language about "upside risks to p[rice stability". The new projections will be released in Septembers meeting and downside revisions there will reduce expectation of further hike from the bank. Euribor futures are already starting to price out further hike but starting to price in 30% chance of rate cut next year. We argued that ECB would keep rates unchanged through 2012. Technically, we're prefer to see EUR/USD taking out 1.46, EUR/GBP taking out 0.89 before confirming underlying strength.

FOMC minutes for the August 9 meeting will be the main focus of today. That's the meeting which Fed changed that language to " warrant exceptionally low levels for the federal funds rate at least through mid-2013", replacing "extended period" with a more explicit time frame. Three members dissented and preferred to continue to keep the "extended period language" which was used in the sixteen previous statements. The minutes to be released today should reveal the debate among policy members on such drastic change. Meanwhile, as Bernanke indicated last week, the September meeting will be prolonged by one delay to allow discussion of further easing from Fed. And today's minutes should give some hints on how hard it would be for Bernanke to convince other fellow policy members to vote for further stimulus measures, and what would those measures be.

On the data front, New Zealand building permits jumped 13% mom in July. Japan household spending dropped -2.1%yoy in July, retail trade rose 0.7% while unemployment rate rows to 4.7%. UK mortgage approvals, M4 money supply and Eurozone confidence indicators will be released in European session. Canadian current account, IPPI and RMPI, as well as US S&P Case-shiller house price and conference board consumer confidence will be released later in US session.

NZD/USD jumps further to as high as 0.8536 today so far and remains firm. However, note that the structure of the rebound from 0.7962 is looking corrective. First target of rebound at 61.8% projection of 0.7962 to 0.8410 from 0.8261 at 0.8538 is almost met. NZD/USD would possibly reverse between 0.8538 and 100% projection at 0.8709 to start another fall to extend the correction from 0.8842 high. Hence, we'll start to look for reversal signal on the next rise. Break of 0.8261 will turn outlook bearish for 0.7962 and below. 

EUR/GBP Daily Outlook

Daily Pivots: (S1) 0.8824; (P) 0.8851; (R1) 0.8870; 

EUR/GBP faced resistance from 0.8886 and retreated. With 4 hours MACD crossed below signal line, a temporary top is formed and intraday bias is turned neutral. After EUR/GBP continues to stay in range of 0.8642/8886 and near term outlook remains neutral. We'd prefer to see breakout on either side to confirm the outlook. On the upside, sustained break of 0.8886 will complete a head and shoulder bottom pattern (ls: 0.8704, h: 0.8642, rs: 0.8653) and confirm completion of decline from 0.9083 and should bring retest of this resistance. On the downside, below 0.8794 minor support should rule out the head and shoulder scenario and turn bias to the downside for 0.8642/53 support zone. Break there will resume whole fall from 0.9083.

In the bigger picture, price actions from 0.9799 (2008) should be unfolding as a consolidation pattern in the long term up trend. The first leg is completed with three waves down to 0.8067. At this point, EUR/GBP is still holding above 0.8610 support. Thus, there is no confirmation of completion of the second leg from 0.8067. Though, even in case of another rise, we'd expect strong resistance ahead of 0.9410 medium term resistance to bring reversal and starts the third leg. On the downside, break of 0.8610/42 support will now be an important bearish signal for 0.8067 and below.

Economic Indicators Update

GMT	Ccy	Events	Actual	Consensus	Previous	Revised
22:45	NZD	Building Permits M/M Jul	13.00%		-1.40%	-1.00%
23:30	JPY	Household Spending Y/Y Jul	-2.10%	-3.50%	-4.20%
23:30	JPY	Unemployment Rate Jul	4.70%	4.60%	4.60%
23:50	JPY	Retail Trade Y/Y Jul	0.70%	1.50%	1.10%
6:00	CHF	UBS Consumption Indicator Jul			1.48
8:30	GBP	Mortgage Approvals Jul		49K	48.4K
8:30	GBP	M4 Money Supply M/M Jul		0.40%	-0.50%
8:30	GBP	M4 Money Supply Y/Y Jul			-0.70%
9:00	EUR	Eurozone Consumer Confidence Aug		-16.6	-11.2
9:00	EUR	Eurozone Economic Confidence Aug		102	103.2
9:00	EUR	Eurozone Industrial Confidence Aug		-0.5	1.1
9:00	EUR	Eurozone Services Confidence Aug			7.9
12:30	CAD	Current Account (CAD) Q2		-13.6B	-8.9B
12:30	CAD	Industrial Product Price M/M Jul		0.00%	-0.30%
12:30	CAD	Raw Materials Price Index M/M Jul		0.00%	-2.20%
13:00	USD	S&P/Case-Shiller Composite-20 Y/Y Jun		-4.90%	-4.50%
14:00	USD	Consumer Confidence Aug		52.5	59.5
18:00	USD	FOMC Minutes

Move in GBPUSD implies a break in short-term uptrend may follow

The 1 hour GBPUSD chart shows that prices now are moving exactly below the strong resistance of the 38.2 percent Fib level and the falling trendline (line 1). These moves imply that a break of the short-term uptrend (line 2) may follow today, which would suggest a continuation of the downtrend. Such a move should establish an initial target of 1.6363 where the pair will face support by the 100-MA and the 50 percent retracement. An eventual break could see the pair target 1.6300.

Forex Technical Set-ups for the Week Ahead

Friday's movement should see EURUSD push towards 1.4700

Having moved higher off 1.4322 support on the weekly chart, EURUSD has clearly broken from the corrective channel (blue). An engulfing green candle from Friday should have the follow through to break through the triangle formation (pink), which should push the pair up towards 1.4700; the previous high; and 1.4746; the weekly trend line.

Bullish views of EURUSD could create long opportunities in GBPUSD

GBPUSD has pushed off 1.6289 support on the weekly. A large reversal candle was recorded on Friday, with the pair unable to hold below support. The pair has yet to make a higher low on shorter time frames.

However, the EURGBP chart (analysis to follow below) suggests a corrective pattern (lower), so with a EURUSD bullish view, pullbacks in GBPUSD might be seen as buying opportunities.

A choppy 3 wave corrective pullback could soon follow for EURGBP

On the weekly chart, EURGBP has recorded a bullish candle off support at 0.8691, however the previous area of resistance can be seen at 0.8880-0.8900.

On the daily chart, after producing a double bottom with divergence EURGBP has rallied strongly.

On the four hour chart, the 261.8% projection of the first wave would take the pair to 0.8894; close to the area of resistance, however the top may be in place from Friday’s 4hr engulfing pattern at the high. A corrective pullback is expected soon in a choppy three wave sequence. This might be seen as an opportunity to ‘get long,’ with the prime area being 0.8770 - 0.8750. A larger Bullish pattern is then likely to unfold with the resistance area (0.8900) broken to the upside.

Whilst views are bullish AUDUSD faces strong resistance at 1.0574

AUDUSD appears strongly bullish on the weekly chart. The pair does however face some some strong resistance at 1.0574.

On the daily chart, it looks like a higher correction is due in an ABC pattern. 1.0638; the 61.8% retracement; looks to be the first area of attraction.

A bullish triangle breakout (4hr engulfing candle) would suggest that the rally could extend past 61.8% with 1.0829 (78.6%) looking more likely.

Despite evidence of investor indecision, AUDJPY could move higher

The previous week produced an indecisive ‘Inside Doji’ in AUDJPY. Last week’s price action produced a bullish candle and; although still an inside candle; this gives the cross a slight upside bias.

Having now broken through resistance, AUDJPY looks set to make a larger bullish ABC correction. A perfect formation would see the pair target 83.50.

On the four hour chart, a bullish engulfing pattern should give the cross enough momentum to break and clear the high from the 17th August.

After consolidating, the DOW could move lower following the rally

Since the strong sell-off at the end of August the DOW has been consolidating in a large triangle formation. This consolidating pattern would normally have a slight bias to break to the downside, however Elliott Wave theory may see this as a 4th wave correction with wave C yet to be fully realised. The weekly candle also shows an Inside Harami candle, which illustrates indecision with a slight upward bias. This should only be a temporary rally before the next major sell off.

GBPJPY shows indecision, with Wave C targetting 127.75 to 128.00

For GBPJPY, the last two weekly candles have been inside the range of the week 8th August. This shows investor indecision at these levels.

The Daily chart suggest that a larger ABC formation has yet to complete with wave C targeting 127.75 - 128.00.

NZDUSD could target 0.8509 within an ABC corrective sequence

Price action in NZDUSD produced an engulfing green candle after the previous week's indecisive inside red.

The pair now looks set to produce a larger ABC corrective sequence with 0.8509 – 0.8612 the prime target area.

An ascending triangle breakout to the upside – trading with the bias could see the pair rally beyond the aforementioned area with 8840 the triangle target.

 

Italian, French banks in trouble; even Bernanke can’t change that

Italian and French banks are the potential ’phoenixes’ in the European banking arena. The characteristics of a bounce back could really hide a great investment trap as three decades of credit expansion has come to an end.

Some of the recent falls in banking shares have been based on ‘reality’ whilst others were considered to be simply ‘innocent’ bystanders. Does this present bargains when the market stabilizes and recovers? Not in France and Italy, in our view, especially as the European interbank market remains under great stress with rates at late 2007 pre-crises levels (see chart 1).

 

Multiple risks ahead
Given the complex nature of the banking system we highlight a number of characteristics that investors should place on the “watch-out’ profile. These are:

1. a level downshift in ROE (chart 2), 
2. sluggish interest margins (less provision costs) coming out of the 08-09 crises (chart 3), and
3. unchanged Balance Sheet leverage (chart 4).

These properties combined with substantial non-domestic activities and, in particular, PIIGS-related debt will determine a risky profile for a European bank today. Italian and French banks have many of these traits in common.

 

Geographies in the cross-hair
Italy and France’s larger banks all have significant non-domestic credit exposure, and in some cases, to rather exotic markets. Furthermore, both countries face heavy sovereign debt pressure, and as government funding costs go up so does the domestic banks', with this being very much the focus of the present market. Rating agencies focus on the quality of the “lender of last resort” and their ability to bail out with lower national ratings spilling over to the ratings of the banks, straining earnings.

High volatility expected
Since the financial turmoil started in early August we have seen large trading ranges in the European banking sector. There was the initial free fall of the market resulting in a high correlation between so called solid banks and those previously pointed out as containing toxic assets. Lately, we have experienced an “attack on the French banks”, particularly Société Generale on the back of rumors regarding urgent funding issues and possible insolvency. Regulators responded with a temporary short-selling ban on all financial stocks.

Thus we think investors will be reluctant to rethink their bearish attitude versus the French and Italian banks.

Daily Report: Dollar Broadly lower on Expectations Fed May Take Actions in Sept

The greenback remained under broad-based selling pressure except against the Swiss franc after Friday's Jackson Hole central bankers gathering on speculation that Federal Reserve may take more monetary policy action next month. Although Fed Chairman Ben Bernanke provided no hints or details of any QE3 to support U.S. economic recovery last Friday in the central bank's annual symposium, he did say the central would extend its September FOMC meeting to 2-day to have more time for discussion on its options. As Bernanke also indicated the Fed is prepared to employ its tools as appropriate to promote a stronger recovery, traders are betting the central bank to announce new stimulus in September extended policy meeting. Another factor pushing the single currency higher to above 1.4500 level was a report from Sunday Times that officials from the ECB are considering to offer central guarantees over debt issued by banks. Having said that, some analysts are not convinced for the euro is able to head too far north partly due to the eurozone debt crisis and remarks from IMF's Lagarde who warned that the global economy is slowing down and in a dangerous phase. There are also rising concerns that eurozone debt crisis are spreading to the European banking system. Nevertheless, with Swiss National Bank keeps appearing to support and EUR/CHF and USD/CHF, euro's downside is likely to be limited at the moment. Offers at 1.4500 were cleared and stops at 1.4550 are within range with mixture of offers and stops tipped further out at 1.4600. Funds and UK names were seen buying euro this morning and bids are reported at 1.4500 and 1.4470.

Another focus for today is the selection of new Japan's Prime Minister, news just came out that former Finance Minister Yoshihiko Noda has been chosen by the ruling Democratic Party of Japan to be the party's leader, hence Noda is set to become Japan's next prime minister. Not much reaction yet in the spot market as traders still await new set of policies and measures to be announced by the new administration on how to stem yen's strength and handle the impact on Japanese economy. Despite surging to as high as 77.00 last week on expectations that Bernanke won't hint on QE3, the USD/JPY fell back to the launching pad last Friday to as low as 76.50. Exporters are still the major selling at the level around 77.00. Therefore, unless Japanese authorities show up again like earlier this month on 4 Aug for another round of yen selling intervention, it would be quite difficult to see USD/JPY trading comfortably above 77.00 level with offers from exporters lining up all the way from 77.10 up to 77.80 (every 10-points interval).

Meanwhile, the Swiss franc is the only major currency that traded lower against the greenback last Friday. Swissy rallied late last week in part due to the release of weaker-than-expected Swiss KOF leading indicator, plus remarks from Swiss Union saying that the franc is ‘massively overvalued'. Obviously there were rumors that the SNB took action to sell Swiss franc, USD/CHF and EUR/CHF rallied to as high as 0.8159 and 1.1735 respectively. Stops above 0.8020, 0.8040 and 0.8100 were finally cleared, although price then retreated from 0.8159, with SNB still sneaking around the corner, downside should be limited and bids are reported from 0.8050 down to 0.8030 and also at 0.8000. Traders definitely see the determination of the Swiss authorities to weaken the Swiss franc, there is also market talk that Swiss banks may start charging offshore CHF deposits which should also dampen the demand for franc.

Elsewhere, aussie continued to surge since last Friday on buying by real money accounts and big Japanese names, cleared offers ahead of stops at 1.0600, active buying in AUD/JPY by Japanese margin traders also seen helping to lift aussie. Although new home sales fell for the second straight month, the number also supported AUD as these weaknesses in housing and new home market leave room for RBA not necessary to cut rates in the meantime.

EUR/USD Daily Outlook

Daily Pivots: (S1) 1.4383; (P) 1.4442 (R1) 1.4556; 

EUR/USD's break of 1.4537 resistance is taking as the first signal that the pair is finally breaking out of recent consolidations. Intraday bias is cautiously on the upside for 1.4695 resistance first. Break will affirm the bullish case and target 1.4939 high and above. On the downside, though, below 1.4328 minor support will dampen this bullish case and indicate that consolidation from 1.4939 is going to extend further with another falling leg to 1.4054 and below.

In the bigger picture, EUR/USD is still trading above medium term trend line support from 1.1875 (now at 1.3941) and thus, rise from there should still be in progress. Break of 1.4939 should confirm rally resumption and should send EUR/USD through 1.5143 resistance towards 1.6039 high. However, considering that weekly MACD has been staying below signal line for some time now, a break below 1.3837 will have the trend line support, as well as 55 weeks EMA firmly taken out. That would argue that the rally from 1.1875 has indeed finished and will bring deeper fall towards 1.2873 support and possibly below.

Economic Indicators Update

GMT	Ccy	Events	Actual	Consensus	Previous	Revised
	EUR	German CPI M/M Aug P		0.00%	0.40%
	EUR	German CPI Y/Y Aug P			2.40%
12:30	USD	Personal Income Jul		0.30%	0.10%
12:30	USD	Personal Spending Jul		0.50%	-0.20%
12:30	USD	PCE Deflator Y/Y Jul		1.40%	2.60%
12:30	USD	PCE Core M/M Jul		0.20%	0.10%
12:30	USD	PCE Core Y/Y Jul		1.40%	1.30%
14:00	USD	Pending Home Sales M/M Jul		0.00%	2.40%

Weekly Review and Outlook: Markets Stayed in Range as Bernanke Delayed Focus to Sept FOMC Meeting

Markets were generally quiet before Bernanke's highly anticipated speech in Jackson Hole symposium, except that gold jumped to record high above 1900 then dropped to 1705 on a sharp pullback. And, after the speech, which Bernanke provided no signal of QE3, markets went wide from initial risk-off and reversed to risk-on. But after all, the activities, most instruments stayed in recent ranges. DOW is bounded inside 10604/11529, Crude oil inside 75.71/89.00, 10 year yield inside 1.978/2.29, dollar index inside 74.18/75.38. Risk sentiments would likely remain steady this week as investors await the next key event of US non-farm payroll.

To make it short, Bernanke dropped no hints on QE 3 from Fed in the speech on Friday and instead, pledged that Fed is "prepared to employ its tools as appropriate to promote a stronger recovery". Also the September FOMC meeting will be extended by one day to “to allow a fuller discussion” on "relative merits and costs" of further monetary stimulus, as well as "economic and financial developments". While stocks were initially sold off after Bernanke's speech, the strong rebound afterwards could be seen as a sign that investors are still optimistic that Fed would do something in September.

The currency markets were generally mixed last week as major crosses were bounded in familiar range. Though, Swiss Franc was noticeably weaker on Friday. There were rumors that Swiss banks would start to charge for franc deposits. This would be another step by SNB to revers Franc's exceptional strength this year, after boosting liquidity, lowering rates earlier.

The Japanese yen attempted a rally after Prime Minister Naoto Kan stepped down. However, gains were limited so far. New prime minister will be selected on Monday and the new government will outline a list of suggestions to deal with a strong yen. However, Economic and Fiscal Policy Minister Kaoru Yosano noted that yen-selling intervention "is a necessary weapon but not one we can use frequently." So, yen crosses would possibly feel heavy at the start of the week.

Australian dollar was also strong after RBA Governor Steven's comments lowered speculations of rate cut from the central in near term. Stevens said that markets are in times of "tremendous turbulence" and it's a "good thing just to sit still". The comments dented that speculation that RBA would kick start a rate cutting cycle and helped lifted AUD/USD towards the end of the week, in particular as stocks rebounded following Bernanke's speech.

Technical Highlights

After much volatility, DOW continued to stay in familiar range above 10604 short term bottom. Consolidations from there would like expect continue for a where. But there is no change in the bearish outlook. 12876 is at least a medium term top on head and shoulder reversal. Current consolidation from 10604 is expected to be limited by 11862 support turned resistance and bring another fall. Break of 10801 support will signal fall resumption to 10000 psychological level first eventually to 9614 (50% retracement of 6470 to 12876 at 9672) at least. 

The CRB commodity index also stayed in tight range after drawing some support from 55 weeks EMA earlier. The structure of the pull back from 370.70 to 315.40 looked corrective so far and more rally could still be seen. Though, we'd prefer to see a break of 351.54 resistance before turning bullish on commodities. Otherwise, then index would possibly gyrate further lower. 

Dollar index continued to stay in tight range of 74.18/75.38 inside a not so wider range of 73.50/76.71. Outlook in the index remains neutral even though we'd prefer a downside breakout as long as 75.38 resistance holds. Break of 74.18, is accompanied by a break of 351.54 in CRB, would likely send the dollar index through 72.69 support to extend the down trend from 88.70. However, note that stocks would likely remain steady at best and is vulnerable to deeper selloff later in September. Indecisive to bearish risk sentiments would possibly keep downside of the dollar index contained by historical low of 70.70 even in case of down trend resumption. And there would be prospect for a sizeable rebound on risk aversion should DOW breaks 10000 level later. 

The Week Ahead

Heavy weight economic data, including ISM and NFP from US will be the main focus this week on driving risk sentiments. In additional, markets will also watch China manufacturing PMI closely. FOMC minutes should reveal the intense debate on using the language of keeping rates low till mid-2013. Also, markets will pay attention to any new measures from Japan curbing yen strengthen as well as from SNB regarding Swiss Franc.

• Monday: German CPI; US personal income and spending;
• Tuesday: Japan household spending, unemployment rate, retail sales; Australia building approvals; Swiss UBS consumption indicator; UK M4 money supply, mortgage approvals; Canada IPPI, RMPI; US S&P/Case Shiller house price, consumer confidence, FOMC minutes
• Wednesday: UK Gfk consumer confidence; Japan manufacturing PMI, industrial production, housing starts; German unemployment; Eurozone CPI, unemployment; US ADP job report, Chicago PMI, factory orders; Canada GDP
• Thursday: China manufacturing PMI; Australia retail sales; Swiss GDP, retail sales, SVME PMI; Eurozone manufacturing PMI; UK manufacturing PMI; US jobless claims, ISM manufacturing
• Friday: UK construction PMI; US non-farm payroll

USD/CHF Weekly Outlook

USD/CHF's rebound form 0.7065 extended further to as high as 0.8156 last week and closed strongly. Initial bias remains on the upside this week for further rally. We'll be cautiously looking for reversal signal at current level as USD/CHF is now pressing the falling 55 days EMA as well as facing medium term calling channel resistance. Nevertheless, break of 0.7769 support is needed to signal short term reversal, otherwise, outlook will remain cautiously bullish. Break of 0.8275 will pave the way to 38.2% retracement of 1.1730 to 0.7065 at 0.8847.

In the bigger picture, while the rebound from 0.7065 was strong, there is no indication of trend reversal yet. We'll stay bearish as long as 0.8275 support turned resistance holds. Current down trend from 1.1730 is still expected to extend through 0.7 psychological level. Though, that would come after some more consolidations above 0.7065 first. Meanwhile, sustained trading above 0.8275 will indicate that such fall from 1.1730 might have finished and open up the possibility of rebounding back to 0.9634 support turned resistance.

In the longer term picture, long term down trend from 2000 high of 1.8305 is still in progress. There are various interpretation of the price actions. But after all, USD/CHF should be resuming the set of impulsive fall from 1.8305 to 1.1288. The current down trend might now be targeting next projection level of 100% projection of 1.8305 to 1.1288 from 1.3283 at 0.6266.

Bernanke is Playing Poker. And well. For Now...

In the spirit of full disclosure, I was in the camp that thought Ben Bernanke would move to full QE right away. But the facts are just such so this my take on them.

From a tactical point of view (as in relative to what he may need to do later) this is good news. He is stating his concern. He is not in panic (at least publicly), and he talks about having more tools if needed. This means 'I will do something if the market drops'. I think his level is 1050/1000 on the S&P 500, then he will be back in force stimulating.

He gains some credibility by focusing on the US debt level and that it’s solution is fiscal plans. He is using classic economic theory that when in a liquidity/debt trap the only real way to gain growth is through fiscal stimulus such as tax breaks, job incentives and other forms of reallocation of investments.

He also directly moves “the ball” over to the US Congress and their need to react to the debt situation. This is good for markets and probably the best news of this speech. It plays to the political theory that the best growth conditions are created through the inability of the political establishment to conduct any form of policy. Think about President Clinton. He came in with major political program but ended up doing... Nothing. Then as a byproduct came growth, a fiscal SURPLUS and earnings. This is the good news.

The “negative news” is that most people had looked for specific targeted help to the mortgage sector through the Fed buying more mortgage bonds. This would have helped the banks that are under pressure, such as Bank of America, by taking risk off their books. This is now delayed, at least temporarily.

Bernanke's position is no different from the ECB, which also feels European fiscal policy needs to play a greater role if the debt crisis is to be resolved. This is a small step for mankind, as we did not get more. 'Extend-and-pretend' for now.

From an equity market perspective, I stick to my theory of a small up-move in risk before final 5th leg down. Being long here, of course, is a risk. I have with the help of Mr. Mads Koefoed, our macro strategist, constructed a “likely” scenario for the S&P over the next three months in order to be totally rudderless. 

 Source: Bloomberg LLP and Saxo Bank

The chart uses the recent low in the market in early August and then projects the future moves in S&P by using a 2008 analogy. This leads to the chart indicating we will move up into late September and then we will start towards a new low in the end of December/Early January.

This is of course not a precise science, but only a reference tool.

Finally, we are presently working on Q4 forecasts and I expect to have two major changes:

• We will adjust our GDP forecast for the US higher relative to consensus based on our leading indicators, which show massive improvement in consumer spending (some of it due to much lower gasoline prices). This also plays to my number one rule of economic projections, namely mean reversion. We were negative on US growth all year and were right. Now we are moving to the opposite, being more positive than the consensus, which is (extremely) low.
• We will start focusing on how the US Dollar may stand up in front of a major strength period which will be based on the US's increase in competitiveness.

Commodities looking for direction from Bernanke

One year ago Ben Bernanke raised the curtain for QE2 in his speech at the gathering of central bankers at Jackson Hole. Once again his speech late Friday CET could set the tone for financial markets in the months ahead as the potential for QE3 has helped trigger some market reversals during the past week.

The Reuters Jefferies CRB index is up just half of one percent at the time of writing bringing its annual return close to flat. Last week’s winners are this week’s losers with gold and silver sitting at the bottom while energy and base metals had a better week. In the agricultural space attention turned to wheat. A deteriorating outlook for U.S. and European production had wheat prices on both sides of the Atlantic performing strongly.

Weak longs washed out of gold
Gold finally succumbed to a sharp correction as weak speculative longs were flushed out sending the price lower by more than 200 dollars in just two days. What triggered the sell-off was probably a combination of a market that had become too overstretched combined with a 55 percent margin increase by the CME which handles the global benchmark gold futures contract.

With daily price swings above three percent the CME felt that the cost of holding a contract worth nearly 200,000 dollars had to be increased. This brought back memories and fears of a collapse similar to the one that hit silver back in May which also occurred after a steep rally was followed by an aggressive margin hike.

Support now at 1,700 dollars
The sell-off however did not go further than 1,705 just short of retracing 50 percent of the recent rally before buyers returned, spurred on by weaker stock markets. The severity of the sell-off has primarily been due to the amount of speculative positions having been built up over the last month and with much of that now out of the way traders felt more comfortable entering the market again. The factors that have been driving gold higher over the last year have not gone away and as such the medium to long term prospect for higher prices hasn’t either.

The Jackson Hole speech by Ben Bernanke of the U.S. Federal Reserve Friday could easily set the tone for the coming months, just like it did last year with the announcement of QE2. High expectations, especially for another round of quantitative easing, have been dwindling over the last couple of days. Given that gold would be the main beneficiary of QE3 a lack hereof could add to the downward pressure. 

Support in the market is now at 1,697 dollars which represents a 50 percent correction of the recent rally followed by moving average supports at 1,570 and 1,480. The uptrend is still firmly in place above 1,450 so even a major drop would not ruin the long-term prospect for gold.

High volatility points towards a bumpy road ahead
Thirty day volatility as measured by the CBOE gold VIX index has been rising steadily over the last month and the current reading of 34.4 percent is some 64 percent above the 2010 average which was another year of strong gold performance. This is telling us that despite the uptrend firm violent corrections like the one experienced this week can easily occur again. Investors who want to benefit from the gold “bubble” therefore need to show discipline in order to avoid being burnt by a market that has become more erratic.

Oil markets driven by Libya and Irene
Early in the week the prospect for high quality Libyan oil returning to the market initially sent oil prices, especially Brent crude, lower. The “relief” sell-off was short lived despite rebel forces entering into Tripoli and thereby bringing forward the potential downfall of Colonel Gaddafi. Traders are fully aware that it could still be many months before oil begins to flow in decent quantities. Many obstacles need to be addressed first, such as establishing security around major fields, pipelines, refineries and ports, a renegotiation of existing contracts and the return of foreign personnel.

The price of Brent crude initially dropped to 105 dollars on the news from Libya but spent the rest of the week recovering back towards 110 as possible sanctions in Syria and force majeure in Nigeria supported prices. Oil demand, especially for diesel, from India and China picked up in July lending support to a Brent crude price above 100 dollars. The spread over WTI crude initially narrowed but has since widened back above 25 dollars as increased U.S. and Canadian production is not easily moved out of the producing regions to the coast from where it can enter into the global market place.

Irene could become the worst in fifty years
Irene, the ninth hurricane of the season is threatening to disrupt gasoline supplies along the U.S. East Coast over the coming days and this helped gasoline putting in a strong performance on the week rising by nearly four percent. It has the potential for becoming the worst hurricane in 50 years and although it is expected to weaken Saturday into Sunday it will probably not happen fast enough to prevent serious problems from wind, rain and ocean water.  

Wheat outperforming corn
The price of December CBOT wheat has risen strongly once again approaching 8 dollars per bushel after touching a low of 6.5 dollars back in July. Record high corn prices are causing livestock farmers to switch to wheat feed. A year-long drought from Texas to Kansas has created the driest conditions on record for farmers who should now be preparing to plant winter wheat. Meanwhile, in Europe the corresponding Milling wheat contract rose the most on the week as Western Europe continues to experiencing tough harvest conditions after a very wet summer. Continued rainfall could result in a higher percentage of wheat being used for livestock feed instead of human consumption thereby adding upside price pressure on high quality wheat. 

 

Daily Report: Dollar Retreats from Highs as Traders Await Bernanke

Although the greenback rallied across the board yesterday as the Federal Reserve looked less likely to announce QE3, the greenback failed to extend yesterday's gain and retreated quite sharply versus most major currencies. In the past 2-3 trading days, the greenback started to rebound as more and more traders changed their view and bet on Fed Chairman Ben Bernanke may not signal addition bond-buying in today's Jackson Hole Symposium, USD/JPY and USD/CHF surged to as high as 77.70 and 0.7989 respectively whilst EUR/USD and GBP/USD slipped to 1.4328 and 1.6260. Dollar retreated against the Japanese yen from a 2-week high of 77.70 (as indicated in our previous update that decent offers remain at 77.90-00). Market has been and is still yen long, with traders couldn't push the yen much higher (this week's high is 76.47) due to persistent bids from semi-official names and intervention fears, dealers are forced to cover their short ahead of today's key event. Having said that, exporters are still determined to defend the level of 78's with heavy offers still seen from 77.80 up to 78.00 and further out at 78.30-50 (large), however, they are unlikely to sell dollar aggressive in their usual month end transactions as they would prefer to wait for the Bernanke's speech (due at 14:00GMT). Current retreat is threatening stops from short-term speculators placed at 76.80 but bids from them are still noted at 77.10 and sizeable stops remain at 76.40 with more buying interest seen around 76.50-60. The much anticipated resignation of Japanese Prime Minister Kan had little impact on the currency market and new leader of the ruling DPJ party will be selected on Monday, with former Foreign Minister Seiji Maehara, being the top-pick. However, the economic minister Yosano said that the government will also release a list of suggestions for the new administration on how to deal with the strong yen, so yen traders shall closely keep an eye on the development next Monday.

After tumbling yesterday to 1.4328 on several bad news, including Greek yields around record high, renewed eurozone debt crisis concerns plus rumors of a German downgrade, euro staged a stronger rebound among other major currencies. The single currency bounced on sign of a possible solution to the differences on the collateral for emergency loans after a report from FT which indicated a so-called ‘euro working group' is examining a non-cash collateral arrangement. Through this arrangement Greece would put up either property or equity in state-owned enterprises as a guarantee against eurozone bailout loans. FT also reported that the euro area will discuss a new version of Finland's collateral agreement with Greece. In addition 3 rating agencies cleared the rumors of a German downgrade as CNBC reported that S&P's Moody's and Fitch all affirmed their ratings on German government debt. Moreover, news that Spanish government said an agreement had been reached with the main opposition People's Party over plans to preserve in its constitution limits on the public deficit, also supported euro. Last but not least, French President Nicolas Sarkozy said after meeting Chinese President Hu Jintao that Hu showed definitive confidence in the euro and the European economy also seen euro positive. As key of the day remains Fed's annual economic conference in Jackson Hole, euro is likely to stay within recent established range of 1.4259-1.4517 ahead of Bernanke's speech.

Meanwhile the Australian dollar benefited from upbeat comments from RBA Governor Glenn Stevens, in his semi-annual testimony before Parliament committee he said Australia was well positioned to tackle any further weakening of international conditions. He also stated that Australia's mining boom along with low unemployment and strong banking system will assist the country to go through global uncertainties.

On the data front, before the Jackson Hole at 14:00GMT, key for the day will be UK Q2 GDP (08:30GMT), US Q2 GDP (12:30GMT) and Aug University of Michigan Confidence survey at 13:55GMT.

USD/JPY Daily Outlook

Daily Pivots: (S1) 76.97; (P) 77.33; (R1) 77.82; 

USD/JPY's recovery extends further to as high as 77.68 so far before retreating mildly. With 76.46 minor support intact, intraday bias is mildly on the upside for further rise. But after all, we'll stay bearish as long as 80.23 and expect more downside ahead. Below 76.46 minor support will flip bias back to the downside. Break of 75.94 will confirm decline resumption and should target 100% projection of 81.46 to 76.28 from 80.23 at 75.05 next.

In the bigger picture, USD/JPY is still staying well inside the falling channel that started back in 2007 at 124.13. There is no indication of trend reversal yet even though medium term downside momentum is diminishing with bullish convergence condition in weekly MACD. Such down trend is still in favor to continue to 70 psychological level. In any case, break of 80.23 resistance is first needed to indicate completion of fall from 85.51. Secondly, break of 85.51 is needed to be the first signal of medium term reversal. Otherwise, we'll stay cautiously bearish in the pair.

Has the Gold Bubble Burst?

During the past two months gold has rallied by a mind blowing 30 percent as an increased number of investors have been seeking refuge in the yellow metal as worries about the health of banks, government debt and slowing global activity have taken their toll on other asset classes. A 400 dollar rally in such a short period of time became increasingly unsustainable but was spurred on by some forecasts of 3,500 dollars or even 5,000 within a foreseeable future had short term speculators piling in.

Over the last two weeks however we have begun to see hedge funds and large investors reducing their exposure. The weekly data from the U.S. Commodity Futures and Trade Commission shows that since 2 August they reduced long futures exposure by 20 percent to 622 metric tonnes. During the same time however exposure to exchange traded products continued to rise with investors adding 40 tonnes to a total of 2,200 tonnes before the sell-off began Tuesday.

What triggered the sell-off was probably a combination of a market that had become over-extended combined with a 55 percent margin increase by the CME which handles the global benchmark gold futures contract. With daily price swings above three percent CME felt that the cost of holding a contract worth 170,000 dollars had to increase. This has brought back memories and fears of a collapse similar to the one that hit silver back in May which also occurred after a steep rally was followed by an aggressive margin hike.

The question everyone asks today is whether the gold bubble has finally burst after a 200 dollar tumble from the 1,913.50 high reached on Tuesday. The severity of the sell-off has primarily been due to the amount of speculative positions having been built up over the last month and with much of that now out of the way many will have a look at the fundamental picture once again. The factors that have been driving gold higher over the last year have not gone away but after having over extended to the upside the near-term risk is one of an overextension to the downside. The Jackson Hole speech by Ben Bernanke of the U.S. Federal Reserve tomorrow at 16:00 CET could easily set the tone for the coming months, just like it did last year with the announcement of QE2. High expectations, especially for another round of quantitative easing, have been dwindling over the last couple of days. Given that gold would be the main beneficiary of QE3 the lack hereof could add to the downward pressure. 

Support in the market is now centered on 1,697 dollars which represents a 50 percent correction of the recent rally followed by moving average supports at 1,570 and 1,480. The uptrend is still firmly in place above 1,450 so even a major drop would not ruin the long-term prospect for gold.

Investors who want to benefit from the gold “bubble” need to show discipline and use trailing stops in order to avoid being burnt by corrections similar to the one we have just experienced. 

Humdinger of a day expected by markets Friday

Pretty quiet this last week in the UK really, with few economic releases of any substance - lacklustre retail sales figures, mixed CBI surveys, (orders better than expected, but sales worse), the Prime Minister even felt able to return to his holiday!

On balance, sterling suffered a little against the dollar and the euro, falling by about 1% against both - maybe because the pound has become a newly annointed safe-haven currency over the recent frenzied months, due to the UK's apparent strict fiscal probity, and this week safe havens of many types were ditched as hopes for QE3 grew, taking equities tentatively higher.

I would be tempted to fade these moves as, even if Bernanke does signal that QE3 is just around the corner, we'll see a very graphic example of the law of diminishing returns, as I believe the market will quickly re-focus upon the Eurozone debt disaster waiting to happen. If he doesn't deliver, and just does the minimum - which will be a verbal guided tour through the various easing options at the Fed's disposal should they need them - then it's 'goodnight Vienna'; risk will be spurned like a rabid dog, and Sterling will be off to the races again.

We're still in a deflationary, debt-trapped world in the West, with the UK being a prime example, and this time next year we'll look back longingly on 2.7% gilt yields.

Tomorrow should be a humdinger of a day, with UK GDP figures, (the Office for National Statistics' second guess, so shouldn't surprise) and, of course, Bernanke on stage tomorrow late afternoon UK time - a must-watch, but I can't see him changing the world by too much, for too long.

Daily Report: Yen Shrugs off Moody's Downgrade and Rises as MOF's Measures Disappoints

The Japanese yen slipped initially early in the morning as Moody's downgraded Japan's sovereign rating for one notch to Aa3 with a stable outlook and on news MOF scheduled announcement at 2:30GMT. The rating agency blamed the Japanese government for large budget deficits and building up of debt since 2009 global recession, whilst unstable leadership hammered the effectiveness of the country's economic strategies. Moody's also indicated that Japan needs to achieve 3% of nominal GDP growth in order to get the nation's deficit problem in check, the plan of doubling the sales tax from 5% to 10% by 2015 may not be enough to solve the debt issue. However, the impact of the sovereign downgrade together with negative rating actions on most Japanese banks proved to be short-lived. Firstly, this was only a catch-up action with S&P's) and secondly, Moody's see current yen level is stressful to the Japanese economy but not dreadful. More importantly is the disappointment after the announcement of MOF Noda for new measures to dead with the yen strength. Japanese Ministry of Finance announced an emergency credit facility will be created at the amount of US$100 billion to assist Japanese firms to cope with the yen's strength. This facility will use dollar funds in the FX reserves to facilitate acquisition of foreign firms by Japanese firms. This emergency package is temporary and will last for one year. Nevertheless, as Noda did not mention anything about intervention and just talked about the government will strengthen its monitoring of the currency market for excessive speculative moves and has asked financial firms to report of their FX positions for the period to end of September, the Japanese yen rose again after the announcement. Still noted bids around 76.45/50 and further out at 76.00-10 with stops remain below 75.90 whilst on the upside, offers from exporters are lined up at 76.85-95 with some stops seen at 77.00 but sizeable stops only emerging above 77.25/30.

The greenback rebounded against other major currencies with EUR/USD slipped from day's high of 1.4442 to 1.4387, once again due to risk aversion as Asian equities are all in the red zone. Yesterday's comments from PBOC adviser Xia saying the FX reserve should be used to buy resources, energy and equities rather than euro debts, seemed still pressuring the euro. In addition, Finland Prime Minister told reporters that he would say yes if Finland could drop out of the Greek bailout plan. This also caused concerns over the effectiveness of the rescue package for eurozone debt crisis. Last in the line of negative comments on euro was former Fed chairman Alan Greenspan, who simply said that the euro is breaking down whilst U.S. is not yet in a double-dip territory. At the moment, bids are still noted at 1.4380-90 for protection of stops below 1.4370 and 1.4345/50 whilst offers from Japanese names (EUR/JPY) related are tipped at 1.4440-50 and further out at 1.4500-10 with stops placed above 1.4520 and 1.4550.

The Swissy extended yesterday's rebound on the back of active buying in EUR/CHF (jumped from yesterday's low of 1.1315 to today's high of 1.1460) and dollar's broad-based strength against European currencies. It seemed that recent actions by Swiss National Bank, including zero rates and intervening in the forward market did put a floor on the USD/CHF and EUR/CHF. More and more analysts are expecting the headline pair to retest last week's high of 0.8020 in the near term. We heard bids from model funds are located at 0.7880/85 whilst offers from European names remain at 0.7990-0.8000. With investors still hoping Fed Chairman Bernanke to announce QE3 on Friday in Jackson Hole speech, dollar's upside is likely to be limited.

Elsewhere, Asian names were seen selling aussie this morning partly due to the release of soft Conference board leading index (-0.8% vs previous -0.1%) and weaker-than-expected construction work done in Q2 (0.7% vs forecast of 1.0%). At the moment, offers are still noted from 1.0500 up to 1.0550, stops at 1.0470 were triggered but bids from real money accounts are still noted at 1.0450/55.

USD/JPY Daily Outlook

Daily Pivots: (S1) 76.43; (P) 76.68; (R1) 76.89; 

USD/JPY continues to stay inside tight range of 75.94/77.19 and intraday bias remains neutral. More consolidative trading would be seen and above 77.19 will bring another recovery. But we'll stay bearish as long as 80.23 and expect more downside ahead. Break of 75.94 will confirm decline resumption and should target 100% projection of 81.46 to 76.28 from 80.23 at 75.05 next.

In the bigger picture, USD/JPY is still staying well inside the falling channel that started back in 2007 at 124.13. There is no indication of trend reversal yet even though medium term downside momentum is diminishing with bullish convergence condition in weekly MACD. Such down trend is still in favor to continue to 70 psychological level. In any case, break of 80.23 resistance is first needed to indicate completion of fall from 85.51. Secondly, break of 85.51 is needed to be the first signal of medium term reversal. Otherwise, we'll stay cautiously bearish in the pair.

Fade the fade from the Fed is the Game

The first news that caught my attention this morning (and made me laugh so much I almost cried!)  was a  “leaked” piece by the Federal Reserve via “Senior Economic Reporter” Steve Liesman of the CNBC. Apparently he is led to believe and needs to share with us that we should not expect much from Fed Chairman Ben Bernanke this coming Friday at Jackson Hole. Nice try Fed! Managing expectations and through the PR agent for Buffet/Fed/Treasury and anyone who is playing the “political” game of “spinning” is a great attempt to fool us – but I will however “fade the fade” so to speak.

The Fed can boast what?
Think about it: Chairman Bernanke has used 3,000 billion US Dollars to create what? Nothing! Unemployment is still above 9.0 per cent, the housing market is still in a slump, and now the only successful thing going for the Fed is the stock market's rise from the floor at 666.00 in March 2009. But now there's talk of an interbank funding crisis and unrealised losses. It certainly smells like 2008, doesn't it? Or what about August 2010? – Yes! It is an almost 100 per cent analogy to last year.

Apologies from Ben unlikely
If you were Fed Chairman Bernanke – what would you do? Raise your hand and say: Sorry! I was wrong – dealing with debt through issuing more debt was wrong – I should have known better, but I was the world class expert on Japan, before I got this, my first real job. I am extremely sorry!

This is not likely to happen, is it? Instead when looking at what you can expect from Bernanke you should look at his academic work, at his policy response when faced with low growth, falling inflation expectations, a banking sector under pressure, and alarming unemployment numbers:  the response has always been the same - print more money!

Source: Google images

Japanisation argument and delayed form of QE
You see, often the argument Bernanke uses concerning Japan and the newly coined economic model called "Japanisation" is that Japan did too little and too much unannounced. Meaning: Quantitative Easing 3 is coming – whether he has the political establishment and full Federal Open Market Committee board behind him or not, he will move to some shape or form of QE – it’s in his "genes", so to speak. He may delay the “official” start and announcement of it until the S&P 500 tanks to below 1000, but that will probably happen already on Friday if he is seen “failing” to give the market what it needs. It's pretty much certain that: fade the fade from the Fed is the game.

Jackson Hole outcome surveys point to no more QE
It should be noted however that based on the surveys I have seen on the expected outcome from Jackson Hole, the Quantitative Easing option has little support anyhow – people are mainly expecting a continuation of the last FOMC meeting – indicating lower rates for longer, a negative assessment of the outlook for the U.S. economy and some emphasising by the Fed about its willingness to do everything needed to restart the U.S. economy.

The second highest probability in the survey is Operation Twist – and this paper called: “Operation Twist and the effect of Large-Scale Asset Purchases” from the Federal Reserve Bank of San Francisco, written by Titan Alon and Eric Swanson, from April 25, 2011 is an essential read to understand the Fed and its thinking. The paper links Operation Twist from the Kennedy Administration with QE2.

Strategy update August 2011
Now in terms of the market and allocation it has been a while since my latest update – to recap recent “signals” – I said one could go short in May with the note: No Silver Bullets and then neutral in July. Now one could consider going outright long again (with a tight mental stop/loss below 1080 in S&P cash) based on reasons which are more tactical short-to-medium term based than an outright belief the market is cheap. It would be a fourth wave correction – after the steep third wave down and ahead of the final fifth wave – which I think will be the end of Dirigisme (or managed economies).

Reason # 1: The 30-year T-Bond yield is getting to the low end of a long-term trend – indicating some “turn around” in risk-off.

Source: Stockcharts.com

Reason # 2: The market is oversold and inflows have started (and Bernanke can only positivelysurprise)

Source: Stockcharts.com

Reason # 3: The perceived “funding crisis” is overdone for now at least….. - see USD into EUR basis swap.

Source: Bloomberg LLP

A Morgan Stanley Research paper pointed out that the largest European banks are more than 90 per cent through their funding targets for 2011 – which does not mean there is no more renewed pressure, but for now they can “live” through 2011 and the real issues is in Q1-2012. Furthermore, it should be noted the LIBOR and EURIBOR is fixing higher every single day – small increments, though still higher.

Reason # 4: The rest of the arguments…..

- Dividend yield is above 10 year yield in the US
- The always bullish analysts appear to be all turning bearish
- Lack of understanding from Anglo-Saxons on the true dilemma in Europe (The political will to do whatever needed in the last minute modus operandi of European history)
- Relatively higher consumer spending in my favourite leading indicator: http://www.consumerindexes.com/
- Growth forecast now at 1.7 percent for 2011 among the pundits (Ivory Tower economists) – down from more than 3 percent at the start of the year and 2.5 percent only in July – there is major mean-reversion in economic projections, now the market is probably too low relative to where we end up.
- Limited risk:  You are probably wrong if S&P cash trades two days below 1080/1090 on a closing basis.

New low in EU commitments
It’s hard not to laugh, again, when reading the recent goals produced by every single player in the EU debt crisis, but there are emerging signs of a  "Mexican stand-off" and this week was certainly a new low in commitments and solidarity in Europe.

This week I read three excellent pieces on the EU which gave me plenty to think about. In particular the paper from Daniel Gros and Thomas Mayer should be a must read as they are outlining what I increasingly think will be the compromise in this standoff:

- CEPS Commentary - August 2011: What to do when the euro crisis reaches the core, Daniel Gros, Thomas Mayers:  Euro crisis reaches the core. They come up with a solution which seems in line with Maastricht and which creates a European Monetary Fund with the European Central Bank as a lender-of-last-resort. Extremely interesting and insightful.

- Spiegel Online: Dutch Finance Minister on the debt crisis:“We are all threatened by contagion” – key paragraphs: “…Should the Greek government not be in a position to fulfill the terms of the bail-out programme, then the Netherlands will refuse to provide any further aid”. Talking about the Finland Clause (Finland getting collateral reference): “As far as we are concerned, no deal has been made” – then he – after this interview moved on to state: “The only thing that helps is for everyone involved to practice verbal discipline”.

- Deutsche Bundesbank, Monthly Report, August 2011:  The comment in this report clearly shows the Bundesbank’s reservation for what’s going on: “With the sovereign debt crisis spreading to other euro-area member states, the Governing Council also reactivated its Securities Markets Programme (SMP). This would, it argued, help restore better monetary policy transmission” – and the whole final paragraph is about how we may need to go to a “worse” place in order to get to a  better place is also a must read:

The recent resolutions transfer sizeable additional risks to the countries providing assistance and their taxpayers, and go a long way towards communitising risks caused by unsound public finances and misguided macroeconomic policies in individual euro-area countries. This weakens the foundations of monetary union, which is based on the principles of national fiscal responsibility and the disciplining effect of capital markets, without noticeably increasing the influence and control over individual national fiscal policies as a quid pro quo. Overall, there is a risk that the originally agreed institutional framework of the monetary union will increasingly become eroded. While fiscal policy will continue to be determined by democratically elected parliaments at national level, the resultant risks and burdens will increasingly be borne by the Community in general and the financially sound countries in particular, without this being offset by any concrete powers to intervene in the sovereignty of national fiscal policies. No comprehensive change in the European treaties is currently envisaged that would democratically empower a central entity to exert some control
over national budgetary policies. This means there is a danger that the euro-area countries’ propensity to incur debt may increase even further, and the pressure on the euro area’s single monetary policy to adopt an accommodating stance may grow. Unless and until a fundamental change of regime occurs involving an extensive surrender of national fiscal sovereignty, it is imperative that the no bail-out rule that is still enshrined in the treaties and the associated disciplining function of the capital markets be strengthened, and not fatally weakened.
Deutsche Bundesbank Monthly Report, August 2011

I know there's too much reading in this chronicle, but all of it important in my view.

Keep the powder dry!