Daily Report: Dollar Extends Rally as Crash in Metals and Stocks Continue

Dollar extends recent rally and rises broadly as the week starts as risk aversion continues to dominate the markets. Investors' sentiments received no boost from the week's IMF/World Bank annual meeting as policymakers are divided on what to do on tackling the current crisis. PBoC Governor Zhou's comment over the weekend reflected that China is still deeper concerned with inflation and sends China stocks to lowest level since July 2010. Aussie and Kiwi are hardest hit today, by the crash in precious metal markets as well as wider than expected trade deficit from New Zealand.

At the meeting over the weekend, IMF called for world policymakers to 'act now and act together' to resume global economic recovery. The world lender said that 'the global economy has entered a dangerous phase, calling for exceptional vigilance, coordination and readiness to take bold action from members and the IMF alike'. World Bank President Robert Zoellick stated that 'the world is in a danger zone' while UK Chancellor George Osborne European leaders had 6 weeks to end the crisis as credible solutions are required to be ready by the next G20 summit in Cannes on November 4. News reports said that German and French leaders have come to some news plans of resolving the sovereign crisis in the 17-nation region. The measures include recapitalization of European banks, expansion of the EFSF to as much as 2 trillion euro and a partial default of Greek debts. Yet, the measures were not verified.

PBoC Governor Zhou Xiaochuan said that "high inflation remains the top concern in China" and there is no "immediate" way to control inflation. China is facing challenges from "relatively fast rises in consumer prices and relatively large amount of capital inflows in the short term". Zhou noted that is "no need for a fundamental change in the monetary or fiscal policies", suggesting China will continue to tighten to curb inflation. Regarding European debt crisis, Zhou noted that he's see if " euro-zone countries can implement their July 21 decision" before determining how China can further help.

The crash in commodity markets since last week is having much pressure on commodity currencies, in particular Aussie. Gold is diving another -5% today and is now trading at around 1550 level, way off the historical high made just weeks ago above 1900. Silver is even weaker as it's losing over -11% today so far. There is no help to Kiwi after reporting wider than expected trade deficit of NZD -641m in August. RBNZ will definitely refrain from further removing policy accommodation in near term while there are already some speculations that RBA would even cut rates within the next six months.

EUR/JPY Daily Outlook

Daily Pivots: (S1) 102.47; (P) 103.09; (R1) 103.95; 

EUR/JPY's fall resumes after brief consolidations and dips to as low as 101.93 so far. Intraday bias is back on the downside for 100 psychological level first and then next near term target at 100% projection of 111.93 to 103.88 from 106.98 at 98.93. On the upside, above 103.75 minor resistance will turn bias neutral again and bring consolidations. But recovery should be limited by 106.98 resistance and bring fall resumption.

In the bigger picture, whole down trend from 2008 high of 169.96 is still in progress and is building up downside momentum again. Sustained trading below 100 psychological level should pave the way to 100% projection of 139.21 to 105.42 from 123.31 at 89.52, which is close to 88.96 all time low. On the upside, break of 123.31 resistance is needed to confirm trend reversal or we'll stay bearish.

EUR/USD Daily Outlook

Daily Pivots: (S1) 1.3422; (P) 1.3494 (R1) 1.3570; 

EUR/USD's fall resumes after brief consolidations and dips to 1.3362 so far today. Intraday bias is back on the downside for 61.8% projection of 1.4548 to 1.3498 from 1.3936 at 1.3287 and then 161.8% projection of 1.4939 to 1.3969 from 1.4548 at 1.2979, which is close to 1.3 psychological level. On the upside, above 1.3566 minor resistance will turn bias neutral and bring consolidations. But recovery should be limited below 1.3936 resistance and bring fall resumption.

In the bigger picture, current development indicates that medium term rise from 1.1875 has completed with three waves up to 1.4939 already. That also suggests that it's merely part of the consolidation pattern that started back in 2008 at 1.6039. Further decline would now be seen to 1.2873 support first and break will target 1.1875 and below. On the upside, above 1.4548, resistance is needed to confirm completion of the fall from 1.4939 or we'll stay bearish in EUR/USD.

GBP/USD Daily Outlook

Daily Pivots: (S1) 1.5349; (P) 1.5420; (R1) 1.5513;

Intraday bias in GBP/USD remains neutral for the moment and some more consolidations would be seen above 1.5327 temporary low. Nevertheless recovery is expected to be limited below 1.5868 resistance and bring fall resumption. Break of 1.5327 will target 161.8% projection of 1.6746 to 1.5780 from 1.6618 at 1.5055 next.

In the bigger picture, rise from 1.4229, which is treated as the third leg of consolidation from 1.3503 (2008 low) should be finished at 1.6746 after GBP/USD completed a head and shoulder top reversal pattern (ls: 1.6298, h: 1.6746, rs: 1.6618). Fall from 1.6746 could be the fourth leg of the consolidation pattern from 1.3503 (2008 low) or resuming long term down trend from 2.1161 (2007 high). In either case 1.4229 resistance should be seen. Break of 1.4229 will bolster the down trend resumption case and would possibly push GBP/USD through 1.3503 low. On the upside, break of 1.6618 resistance is needed to invalidate this view. Or we'll now stay cautiously bearish in GBP/USD.

Economic Indicators Update

GMT	Ccy	Events	Actual	Consensus	Previous	Revised
21:45	NZD	Trade Balance (NZD) Aug	-641M	-321M	129M	111M
8:00	EUR	German IFO - Business Climate Sep		106.5	108.7
8:00	EUR	German IFO - Current Assessment Sep		115.5	118.1
8:00	EUR	German IFO - Expectations Sep		97.4	100.1
14:00	USD	New Home Sales Aug		295K	298K