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.