Risk Selloff Continues as G20 Ignored

Risk selloff continues today with Asian equities broadly lower today following the -391pts fall in DOW overnight. Markets played little attention to the G20 statement, where the group pledged to "take all necessary actions to preserve the stability of banking systems and financial markets as required." Basically, the G20 IMF/World Bank meeting offered no surprise to the markets. Nevertheless, regarding Eurozone debt crisis, Eurozone countries will implement "necessary actions to increase the flexibility of the EFSF and to maximize its impact in order to address contagion." This is interpreted by some that Eurozone countries are leaving the options open for leveraging the EFSF fund for use in buying government debts in secondary markets.

A lot of comments from ECB officials. Vice President Constancio said "sustained buying of government paper by the central bank would only postpone problems and delay the necessary fiscal adjustments." Governing Council member Knot said that he's "now less definite in excluding a default bankruptcy than I was a few months ago". Governing Council member Liikanen said "there is a big risk that the European debt crisis contagion cannot be dammed from spreading to a global crisis." When asked about rate cut, Governing Council member Coene said "if the data in early October shows that things are worse than we anticipated we will look at the kind of decisions we have to take for that."

Technically, note that DOW breached August low of 10604 overnight even though it managed to close at 10733. The development suggests medium term fall that started back in April/May is finally resuming and could send DOW below 10000 level in near term. 

However, S&P 500, is still holding above corresponding support of 1101. Thus, there's no confirmation of such move yet. In any case, both indices are vulnerable to deeper fall. Risk aversion will likely continue to support dollar. In addition to that, a main focus now will be on whether gold can hold 1700 psychological level. We're neutral in gold for the moment and expects strong support from 1700 to bring rebound to extend recent range trading between 1700 and 1900. However, should gold breaks through 1700 with strength, deeper selloff will likely be seen and in that case, dollar's rally could accelerate with support from liquidation in gold. 

USD/JPY Daily Outlook

Daily Pivots: (S1) 75.88; (P) 76.42; (R1) 76.75; 

Intraday bias in USD/JPY remains neutral for the moment. Consolidation from 75.94 might extend further but in case of another recovery, we'd expect strong resistance from the falling trend line (now at 78.05) to limit upside. On the downside, below 76.11 will bring retest of 75.94 first. Break will confirm resumption of whole fall from 85.51.

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.