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.

Weekly Review and Outlook Risk Recovery Finished, Revisiting Recent Lows ahead of Jackson Hole?

The recovery in market sentiments was rather short-lived as risk selloffs resumed towards the end of the last week. Disappointment from the Franco-German summit turned market around and there was renewed worry on interbank liquidity stress. Global economic data continued to disappoint and point to further slowdown while investment banks such as Citigroup and JP Morgan downgraded their forecasts on US growth while Morgan Stanley trimmed its global growth outlook, warning the US and Europe are 'dangerously close to recession'. Major equity indices stumbled on Thursday and Friday while gold made another record high at 1881.4 and is marching towards 1900. The currency markets, though, were relatively calm. Commodity currencies were generally low but loss was so far limited. Swiss Franc is relatively indifferent to risk aversion on concern of intervention from SNB. Yen was higher but momentum as unconvincing. Surprisingly, Sterling was the strongest currency last week on safe haven flows. At this point, it looks like there will be another around of risk selloffs to push equities to new yearly low ahead of the highly anticipated Jackson Hole symposium.

The Franco-German meeting failed to come up with solutions to settle the debt crisis. Leaders of biggest economies in the 17-nation region proposed to create a 'true European economic government' which will eventually lead to a common tax and fiscal policies within the Eurozone. Concerning fiscal issues, Germany and France will create a common corporate tax base and tax rate between the 2 countries from the start of 2013. Moreover, they will propose in September the imposition of a new financial transaction tax across all Eurozone members. While the details of the types of taxes were not provided, investors were obviously irritated by the financial transactions tax as the euro and equities plunged after the announcement.

The ECB said that it has recently lent US$ 500M in its 7-day liquidity-providing operation to a bank at above market rates. This was the first time since February that the facility was used. Fears that more banks will seek ECB's funding because of their heavy exposure to debts of Greece and other debt-ridden countries increased and would make the market outlook negative. Concerns over contagion of Eurozone's sovereign crisis have spread to the US. The WSJ said that US regulators are taking a closer look at the US units of Europe's biggest amid concerns that the region's debt problems will spread to the US banking system. The report said that the New York Fed is 'very concerned' about the issue and has been seeking information about the banks' ability to access funds to maintain their US operations. New York Fed President Dudley denied the officials are watching a particular group of banks closely and reiterated that the central bank treats US and European banks 'exactly the same' and is 'always scrutinizing banks'.

Sterling was somewhat supported by safe haven flows into UK government debts even though the economy remains weak and chance of more easing from BoE is high. Yield also sank after minutes revealed that MPC members Dale and Weale abandoned the call to hike rates in last meeting.  UK 10 year gilt yield dived to record low of 2.273% on Thursday before closing the week at 2.39%. Safe haven flows pushed EUR/GBP to as low as 0.8653 last week but the rebound on Friday suggests that investors are not ready to get themselves more committed to the pound yet and the cross will remain mixed in near term.

Selloff in stocks was steep on Thursday and Friday, where we have DOW down from intraday week high of 11529 to close at 10817. DOW, S&P 500, NASDAQ, FTSE 100 and CAC 40 managed to hold above recent low. However, note that DAX has indeed dived through prior week's low of 5487 and closed at 5480. The German index could be leading the way down as other major global indices extend the fall to test recent lows this week. 

Sentiments somewhat stabilized briefly on news that Olli Rehn, the European Union commissioner for economic and monetary affair said that EU may present a report to European Parliament and the Council on the setup of a "system of common issuance of European sovereign bonds" under joint and several liability". However, the idea of Eurobond will face strong opposition just as European Union President Herman Van Rompuy expressed that there will be Eurobonds only when there is " genuine budgetary convergence, the day when everyone is in balance or virtually in balance."

Technical Highlights

DOW's recovery from 10604 might have completed at 11529 last week, ahead of mentioned 11862 resistance as expected. It's a bit early to confirm fall resumption for the moment, but the index is nonetheless vulnerable to deeper fall ahead. We'll stay cautiously bearish as long as 11529 resistance holds and expect an eventual downside breakout soon towards 61.8% projection of 12753 to 10604 from 11529 at 10201 in near term. As noted before, the index has completed a head and shoulder top reversal pattern earlier and the current fall should eventually target key cluster level of 9614 (50% retracement of 6470 to 12876 at 9673) and below. 

While gold made another record high against dollar at 1881.4 last week, it's also exceptionally strong against other major currencies. XAU/EUR jumped to new record high at 1312.92 last week before retreating back below 1300 psychological level to close at 1286.23. Near term outlook will remain bullish in any case as long as 1201.96 support holds and we'd expect further rise towards 261.8% projection of 954.11 to 1088.1 from 1021.21 at 1371.97 next.

The dollar index continued to stay in familiar range as recent consolidation continued, just like the EUR/USD. At this point, a downside break out is mildly in favor as long as 75.383 resistance holds. Break of 71.48 will target 72.69 first. Further break there will confirm resumption of the whole down trend from 2008 high of 88.70 and should target historical low of 70.70. On the upside, above 75.38 will turn focus back to 76.71. resistance but break there is still needed to signal trend reversal. Or, we'll stay neutral at best in the index.

The Week Ahead

A number of important economic indicators will be released this week, including Eurozone PMIs, German ZEW and Ifo, US and UK GDP revision. Nevertheless, main focus will definitely be on the Jackson Hole symposium. After the Fed announced to keep interest rates at exceptionally low levels at least through mid-2013 on August 9, the market has been increasingly speculating that Chairman Ben Bernanke will signal additional easing measures at the meeting next week. According to a CNBC survey done after the FOMC meeting, 46% of respondents said the Fed will resume QE, up from 19% in the July survey while 37% said the Fed will not do QE, down from 68% in July. Also, of those who believe the Fed will resume QE, the asset purchases are expected to average at 628B, up from 377B in July.

• Tuesday: Eurozone Flash PMIs, German ZEW; Canada retail sales; US new home sales; New Zealand trade balance
• Wednesday: German Ifo; US durable goods; New Zealand retail sales
• Thursday: German Gfk consumer sentiment; Swiss ZEW; US jobless claims
• Friday: Japan CPI; UK GDP revision; Swiss KOF; US GDP revision

EUR/GBP Weekly Outlook

Despite dipping to as low as 0.8653 last week, EUR/GBP held above 0.8642 support and recovered strongly before closing. The development suggests that recent sideway trading is not finished yet and we'll continue to stay neutral. on the upside, above 0.8886 will re-affirm the case that fall from 0.9083 has completed at 0.8642 and should bring stronger rise to retest 0.9083. On the downside, however, break of 0.8610/42 support zone will has medium term bearish implication and should bring deeper fall to 0.8284/8355 support zone first.

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 with daily MACD staying above signal line. 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.

In the long term picture, long term up trend from 2000 low of 0.5680 shouldn't be over yet and the choppy fall from 2008 high of 0.9799 should be a correction only. We'd expect such correction to be contained by 0.7963/0.8186 support zone and bring up trend resumption. Rise from 0.5680 is still expected to extend beyond 0.9799 high eventually.

Weekly Review and Outlook: Risk Sentiments Stabilized for Now, More Consolidations Before Jackson Hole

Risk selloff intensified initially last week in response to S&P's downgrade of US rating and the hollow statement G7 regarding the current market turmoil. Though, sentiments "stabilized" as the week went on, after Fed pledged to keep rates low until mid-2013. The attempt to extend the spotlight of European debt crisis to France was unsuccessful and that's followed by banning of shorting financial stocks in France, Italy, Spain and Belgium. Also, Spanish and Italian yields dropped sharply after ECB buying. Major world equity indices recovered strongly from intra-week lows. However, we believe that the market sentiments were just "stabilized" rather than reversed. The European debt crisis won't go way that easily. And global economies, including US, UK and Eurozone are poised to slow down on austerity measures, dragging down other parts of the world. So, risk assets will remain vulnerable to further selloff even though more consolidations would likely be seen before Bernanke's Jackson Hole Speech on August 26.

The Fed delivered a much more dovish policy statement in August as the path of recovery has been 'considerably slower than expected'. As a prelude to additional easing, the central bank pledged for the first time that interest rates will stay at exceptionally low levels at least until mid-2013 and reinvestment of maturing proceeds will be maintained. Wall Street rebounded after the report as investors looked forward for additional stimulus in coming meetings. Meanwhile, markets will be eagerly waiting for Bernanke's speech in the Jackson Hole meeting. Bernanke announced QE2 at Jackson Hole last year and there are rumors that he will also announcement something that moves market this year. That might include additional bond purchases of over $1T, targeting at long term securities like 10 year and 30 year bonds to push funds back to risk assets. In addition, Fed might remove the interest payments given to excess bank reserves at the central bank. We'll wait and see what Bernanke finally delivers.

In the currency markets, the biggest shock was the reversal in Swiss Franc's strength after SNB official talked about temporary peg to Euro. SNB Vice Chairman Thomas Jordan was quoted saying "any temporary measures to influence the exchange rate are permissible under our mandate as long as these are consistent with long-term price stability," and that could include a temporary peg to Euro. SNB's move of cutting rates, adding liquidity to the markets are so far very ineffective. Meanwhile, SNB officials should be aware of the fact that outright intervention in the markets in 2009/10 caused substantial losses with little impact and almost triggered Chairman Philipp Hildebrand to step down. While we should still have a long distance from pegging Swiss Franc with Euro, the SNB might have strong determination to defend EUR/CHF from breaching parity. A wide range of tools could still be used and as Jordan hinted, that might include creating negative interest rate environment for non-resident Swiss Franc deposits. There is also call for tax on foreign deposits.

While the Swiss franc pulled back sharply, the Japanese yen was the strongest currency last week on safe haven flows. Though, we saw some hesitation to push the Japanese yen further lower towards the end of the week, partly due to recovery in stocks. Japan's Finance Minister Yoshihiko Noda declined to comment on the effectiveness of the unilateral intervention on August 4. But he warned that Japan would consider various options to curb yen's strength if excessive yen rises persist.

The BOE lowered its economic forecasts amid global economic turmoil. In the latest quarterly inflation report, policymakers stated that the biggest risk came from sovereign crisis in the Eurozone. Risks to growth are skewed to the downside as slowdown in growth may turn out to be more persistent than previously expected. The BOE retained the view that inflation will return to a little below target in the medium-term. The BOE left the Bank rate unchanged at 0.5% and the asset purchase program at 200B pound at the meeting last week. Yet, it reiterated the flexibility to add or remove stimulus measures when conditions warrant.

Technical Highlights

S&P 500 dived to as low as 1101.54 last week before drawing support from 38.2% retracement of 666.79 to 1370.58 at 1101.73 and recovered. A short term bottom is in place. However, note firstly that price actions from 1101.54 are so far corrective which suggests it's merely consolidations. Also, please be reminded that S&P 500 completed a medium term head and shoulder reversal pattern earlier (ls: 1344.07, h: 1370.58, rs: 1339.62). The trend line from 666.79 was also firmly broken. So, we'd believe that whole up trend from 666.79 was over. Hence, upside of the current consolidation should be limited by neck line resistance at around 1260 level and bring fall resumption. S&P 500 should eventually break through 1101.54 towards 1010.91 key support and below. 

Dollar index continued to engage in range trading around 55 days EMA last week. Near term outlook remains neutral. The dollar index might continue stay in range of 74/77 for a while but the current development is still favoring more downside. Break of 74.18 will likely send the index through 72.69 towards 70.70 record low.  

GBP/CHF basically followed other swiss crosses, diving to new record low of 1.1464 initially then rebounded strongly. A short term bottom is in place after brief break of long term target of 161.8% projection of 2.4965 to 1.5112 from 1.8113 at 1.2024. More rise would likely be seen initially this week. But at this point, we'd expect strong resistance from 1.3038 cluster resistance (38.2% retracement of 1.5691 to 1.1464 at 1.3079) to limit upside. We'd expect some sideway consolidation above 1.1464 before the long term down trend finally resumes to parity. 

Australian dollar has been extremely weak in the past two weeks, just as other commodity currencies. EUR/AUD's rebound from 1.2927 extended to as high as 1.4261 but failed 1.4341 resistance and retreated. AUD/USD is at a junction as it's just hold above a medium term retracement level. And Aussie's fate would very much depends on whether AUD/USD would have another deep fall and on whether EUR/AUD would take out 1.4341 resistance. Decisive break of 1.4341 will complete a double bottom reversal pattern (1.2926, 1.2927) and would signal completion of the down trend from 2.1127 and medium term reversal. But before that, we'll stay neutral in cross first.

The Week Ahead

Risk sentiments should remain stable this week and stocks, as well as commodity currencies might extend recovery. But upside potential should be relatively limited and markets would like like stay in range for a while. Dollar, Euro and Sterling would likely stay in range against each other, going nowhere though the pound is vulnerable to some weakness considering the even risks. Swiss France and Japanese yen might try to regain some strength towards the end of the week.

• Monday: Japan GDP; US Empire State Manufacturing, TIC capital flow, NAHB housing market index
• Tuesday: RBA minutes; German GDP, Eurozone GDP; UK CPI; US new residential construction, industrial production; New Zealand PPI
• Wednesday: UK employment, BoE minutes; Eurozone CPI; UK PPI
• Thursday: Japan trade balance; UK retail sales; US CPI, jobless claims, existing home sales, Philly Fed survey
• Friday: German PPI; UK public sector net borrowing; Canada CPI

USD/CHF Weekly Outlook

USD/CHF dived to new record low of 0.7065 last week but staged a strong rebound since then as the Swiss Franc pulled back sharply after SNB comments. At short term bottomed is formed at 0.7065 and we'd expect more consolidations above this level for a while. Further rebound is expected initially this week to 0.7801 resistance and above. Though, we'd expect upside to be limited below 0.8081 resistance and bring another fall to extend the consolidations. Below 0.7548 minor support will flip bias back to the downside for retesting 0.7065 first.

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 1.1740 has finished and open up the possibility of rebound 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.

Daily Report: Euro and Sterling Trade Lower on Massive Risk Aversion as Global Equities Selloff Intensifies

The single currency and sterling both dropped on risk aversion, USD/JPY also fell as stock markets as Asian stock markets followed the selloff in European and U.S. equity markets and tumbled, most European indices slipped over 3% (STOXX 50 and FTSE 100) with German DAX dived over 5%, then U.S. major indices were also sharply lower, DJI (-5.55%, biggest selloff since December 2008), S&P 500 (-6.66%) and NASDAQ (-6.9%). Nikkei 225 and Hang Seng opened lower this morning and Nikkei broke 9000 and currently still down by 2.3% whilst Hang Seng once plunged over 6% below 20000 but has rebounded from low. The greenback against the Japanese yen back to the launching pad level right before Bank of Japan intervened the currency market last week, however, still heard decent bids around 77.00. Japan's Finance Minister Yoshihiko Noda repeated today that he is closely watching the financial markets, then BOJ Governor Masaaki Shirakawa also said that he is worried by volatile exchange rate and excessive yen rise would have a negative impact on the country's economy, however, early comments from Noda saying G7 did not discuss specifics on intervention in the meeting yesterday gave traders signal that there may not be joint intervention like back in March. USD/JPY did rebound briefly on verbal warnings from Japanese officials but the pair was down again due to the lack of real action by BOJ/MOF. Bids are still noted from 77.00 down to 76.50 with sizeable stops remain below 76.20 and 76.00, On the upside, offers are lined up around 77.80-90 with some stops seen at 78.00 but more selling interest should emerge around 78.50 with next batch of stops located at 79.10 and 79.50.

Intensified risk aversions on free falling European and U.S. shares pressed euro sharply lower yesterday from 1.4432 to as low as 1.4130, statements from Standard & Poor's also bough relief to the greenback as the rating agency indicated that despite the downgrade of U.S. sovereign rating, the ratings of some states and local government will be kept and stay above the statues of the sovereign, S&P's also stated that rating on U.S. banks will not be affected by the downgrade of nation's sovereign. Having said that, the single currency rebounded in Asian session after finding decent demand from sovereign names, unwinding in EUR/JPY as Hang Seng recovered almost 50% of early losses also seen supporting the pair. Good bids from same parties are still noted from 1.4150 down to 1.4130 with stops placed below latter level, more buying interest is likely to emerge around 1.4100 and 1.4070 with next batch of stops below 1.4050. On the upside, offers are reported at 1.4250-60 and further out at 1.4300.

Sterling basically followed euro's foot-steps, dropped throughout yesterday and hit a low of 1.6269 this morning on massive risk aversions and youth riots in London, however, cable also rebounded from low as Asian bourses bounced off lows. The release of better-than-expected UK data also seen lifting sterling, BRC sales data came in at 0.6% versus forecast of -0.5% and RICS House Price data also showed higher-than-expected number at -22.0% against consensus of -28.0%. The British pound is likely to confine in narrow range ahead of the release of UK June industrial and manufacturing production data at 08:30GMT with forecast at 0.4% m/m and 0.2% m/m respectively. Order books are relatively light today with some offers tipped at 1.6350-60 and 1.6380-90 with stops placed above 1.6400 whilst bids from Asian and Middle East sovereign names noted from 1.6300 down to 1.6270 with stops placed below 1.6250-60.

Continued safe-haven demand pushed Swiss franc higher again and Swissy was hovering near its record low formed at 0.7480 and stops below this level are in focus with option barrier tipped at 0.7450, offers are reported at 0.7650 with stops only emerging above 0.7700 and 0.7750.

AUD/USD Daily Outlook

Daily Pivots: (S1) 1.0093; (P) 1.0272; (R1) 1.0363; 

AUD/USD dives to as low as 0.9926 but drew some support from mentioned 38.2% retracement of 0.8066 to 1.1079 at 0.9928 and recovers. Intraday bias is turned neutral for the moment and some sideway trading might be seen. But near term outlook will remain bearish as long as 1.0526 resistance holds and another fall could still be seen. Decline from 1.1079 is treated as a correction in the long term up trend. Below 0.9926 will target channel support (now at 0.9652). Though, break of 1.0526 will indicate short term bottoming and will flip bias back to the upside for retesting 1.1079 high.

In the bigger picture, bearish divergence condition daily MACD suggests that rise from 0.8066 might be finished. And that's possible considering that AUD/USD has just missed a long term projection target at 1.1084. The break of 1.0390 support affirms this case and deeper decline would now be seen towards long term channel (now at 0.9652). But we will treat it as a correction only. And, as long as 0.9404 resistance turned support holds, the whole up trend from 2008 low of 0.6008 should still be in healthy status.

Markets Had to Contend With a Volatile Euro-Zone Situation

EUR/USD

There was an element of consolidation ahead of the US data on Friday with a reluctance to maintain aggressive positioning, especially given further Euro-zone turbulence. The headline employment data was slightly stronger than expected with a non-farm payroll increase of 117,000 for July after a revised 46,000 increase the previous month while the unemployment rate dipped to 9.1% from 9.2%. Job creation was still lacklustre and there was a further significant decline in government employment.

There was further speculation that the Federal Reserve move towards additional quantitative easing given the weak data and markets were already on alert ahead of Tuesday’s FOMC meeting.

The employment data was over-shadowed later in the US session by rumours of a US credit-rating downgrade and after the market close Standard & Poor’s confirmed that it has downgraded the sovereign rating to AA+ from AAA with a negative outlook. There was controversy over the decision with the ratings agency making base-line errors which distorted their calculations. The downgrading did undermine the dollar and US economic policies also came under attack from China.

Markets also had to contend with a volatile Euro-zone situation as underlying confidence continued to deteriorate amid rumours of capital flight from Italy. The ECB announced that it would consider buying Italian and Spanish bonds in the secondary market if Italy accelerated economic reform. In a series of emergency meetings, the Italian government pledged to accelerate reform and the ECB also announced over the weekend that it would buy bonds despite further signs of division within the Governing Council.

The combination of ECB support and US ratings downgrade pushed the Euro sharply higher at the Asian open on Monday, but it failed to sustain the gains as uncertainty remained extremely high with G7 pledging to stabilise markets after their own emergency discussions.

Yen

The dollar moved higher following the US employment data on Friday with relief over a slightly stronger than expected report triggering highs near 79, but it was unable to sustain the gains and drifted back to the 78.50 area.

There was an opening gap lower in Asia on Monday following the US credit-rating downgrade as confidence in the US fundamentals remained weak.

There were warnings over further intervention, but G7 members made no explicit reference to the dollar/yen rate in their weekend discussions. There were reports that last week’s Bank of Japan intervention was over JPY4trn and the central bank also announced that it won’t drain the funds from the money markets, maintaining a very high degree of yen liquidity.

The yen still gained important support from the wider deterioration in risk appetite with a test of support below 78 on Monday as regional bourses fell.

Sterling

UK events and Sterling again tended to be over-shadowed by news events in the US and Euro-zone during Friday. There was further nervousness surrounding the UK banking sector with weak results combined with further fears over a second credit crunch undermining confidence, especially given the potential impact on UK lending.

The Halifax house price index recorded a 0.3% increase in prices for July, but the Rightmove organisation reported a further deterioration in buying support from first-time buyers which maintained fears over the underlying housing outlook with a lack of volume.

As the US currency came under pressure, Sterling rallied from below 1.63 to highs near 1.6480 before retreating again as volatility remained high. ECB action to support the Italian and Spanish markets would tend to ease banking-sector fears, at least in the short term, which would also underpin Sterling, but there will still be fears over the UK and international growth outlook.

Swiss franc

The dollar was unable to make any sustained headway against the franc during Friday with resistance above 0.77 as underlying demand for safe-haven currencies remained strong.

There was fresh demand for the Swiss currency following the US credit-rating downgrade as risk appetite continued to deteriorate and a G7 pledge that they were willing to stabilise markets also failed to provide lasting support for the dollar. The US currency spiked lower to test record lows below 0.7550 in Asia on Monday before finding some support. National Bank policy actions will remain under very close focus due to speculation over intervention or other direct measures to curb the franc.

Australian dollar

The Australian dollar hit resistance above 1.0520 against the dollar in choppy trading on Friday and briefly tested support below 1.04.  There was renewed selling pressure on the currency in Asian trading on Monday as underlying risk appetite continued to deteriorate.

The domestic data provided no support with a decline in job ads, although international trends tended to dominate.  There were increased fears surrounding the global economy and, after some initial resilience, there was also a sharp downward move in Asian equity markets which fuelled additional selling pressure on the Australian currency with four-month lows just above 1.03.

Weekly Review and Outlook : Swiss Franc to Remain Strong in Rough Markets

Risk assets tumbled sharply in panic selling last week. The three major US stocks indices, DOW, S&P 500 and NASDAQ had the worst week since the 2008 financial crisis. DOW lost -5.75% during the week, erasing all gains made since the beginning of 2011. The S&P 500 Index plummeted -7.19% to settle at 1199.38, the lowest level since November 2010. NASDAQ was down -8.12%. More importantly, all three indices broke through key support levels to complete significant medium term head and should top patterns which had very bearish implications. The CRB commodity index dived through key support level at 326 to extend the medium term decline while crude oil was down -9.22%. Safe haven flow boosted US treasures, where 2 year yield made record low, and gold, which made new record high.

In the currency markets, commodity currencies, the Aussie, Kiwi, and Loonie, were the biggest losers, reversing most, if not all of July's gain. The picture of who's the biggest winner was complicated by intervention acts from SNB and BoJ.Dollar managed to gain against most of other major currencies, thanks to the moves from SNB and BoJ to curb gains in Swiss Franc and the Japanese Yen. Meanwhile, dollar was also boosted by strong depend for US treasury yields. Nevertheless, we'd like to emphasized that firstly, Swiss Franc remained the strongest currency in the risk averse markets and managed to make new record highs against Dollar and Euro even after SNB announcement. Secondly, Yen also, pared much of it's loss on Friday and there was no confirmation of reversal in yen's up trend so far. Thirdly, dollar is indeed still bounded in range against Euro and Sterling.

ECB's lack of address to the Spain and Italy problem was taken as the scapegoat for Thursday's selloff. Markets has indeed stabilized on Friday on news that Italy will speed up it's austerity and ECB would buy Spain and Italy bonds. But in any case, investors were getting increasingly inpatient and concerned on the never-ending European debt crisis, which simply won't go away in investors' minds. Austerity measure will also certainly drag down growth in the region and risk bringing the region back into recession. On the other hand, in spite of a better than expected Non-farm payroll figure released on Friday, other economic data from US were mostly, if not all, pointing to deeply slowing growth. Speculation on QE3 from Fed intensified but this time, markets were very doubtful on the effectiveness of further easing.

Volatility will certainly continue for this week considering that firstly, S&P downgraded US' rating to AA+ (from AAA) after the US market closed on Friday. Secondly, European central bankers will hold an emergency conference call on Sunday to discuss latest development in the debt crisis. Thirdly, it's believed that G7 leaders will also hold a conference call on both issues.

Looking further ahead, note firstly that last week's development in risk assets could have marked a major medium term turning point. Some recovery in risks might be seen in near term after last week's panic selling. But there are now tremendous risks on the downside in medium term as global economic outlook deteriorates further. Hence, one should avoid catching rebounds in commodity currencies unless risk outlook does change. Secondly, we're maintaining our view that Dollar, Euro and Sterling are going nowhere against each other, even though Sterling appears to be having a small upper hand against the other two. Thirdly, Yen would have some difficulty in extending its up trend on threat of intervention but we don't believe that unilateral intervention would have much effect. So, we'd indeed try to avoid going long or short on yen crosses. And by the way, Yen is highly correlated to risk and yields, but it's not a safe haven currency. Fourthly, Swiss Franc indeed still the preferred safe haven currency, in particular in consideration of the debt problems in Eurozone. AUD/CHF, NZD/CHF and CAD/CHF offer much downside potential should sentiment worsens.

Technical Highlights

Head and shoulder top patterns were seen in DOW, S&P 500 and Nasdaq last week. S&P 500's pattern was the prettiest among the three (ls: 1344.07, h: 1370.58, rs: 1339.62). From a short term point of view, some support might be seen around 61.8% retracement of 1010.91 to 1370.58 at 11408.30. But rebound attempts should face strong resistance from the neck line, which is around (1260 level). We'll stay bearish as long as 1260 holds. 

In the bigger picture, the long term trend line from 2009 low of 666.79 has clearly been broken by last week's sharp decline. It's at bit early on determining how far the current fall would go but 38.2% retracement of 666.79 to 1370.58 at 1101.73 will likely be breached. The key level should indeed be near term 1010.91 support, which is close to 50% retracement at 1018.68. We'll revisit the possibility of taking out this key level after seeing the structure of the anticipated near term rebound.

Outlook in the CRB commodity index is also bearish as the break of 326.74 support last week confirmed resumption of the whole fall from 370.70. Further decline should be seen ahead. At this point, there is no clear indication of trend reversal yet. Main focus will be on 300 psychological level, which is close to 38.2% retracement of 200.15 to 370.70 at 305.55 and 100% projection of 370.70 to 326.74 from 350.50 at 306.50. Decisive break of this cluster level will pave the way to 250 and below.

Dollar index's rebound last week invalidated the immediate bearish case and turned outlook neutral. The dollar index might stay in range of 74/77 for a while but the current development is still favoring more downside. Break of 74.18 will likely send the index through 72.69 towards 70.70 record low.

The Week Ahead

Markets will certainly be rough considering the uncertainties we're facing. Initial focus will be on market's reaction to US downgrade and any announcements from Eurozone leaders or G7. Focus will then turn to FOMC where markets are expecting a change in the statement's language to reflect the deteriorated outlook and for starting to set the stage for more easing. We're anticipating recovery in risk assets but such recovery shouldn't last long. 12000 in DOW, 1260 in S&P 500 will be the key levels to watch for and as long as these levels hold, selloff in stocks should resume sooner or later. In such case, swiss franc will remain the main beneficiary while commodity currencies will be hardest hit.

• Monday: Swiss unemployment rate; Eurozone Sentix investor confidence
• Tuesday: UK BRC retail sales, RICS house price balance, industrial and manufacturing production, trade balance; China CPI; Canada housing starts; FOMC rate decision
• Wednesday: China trade balance; BoE inflation report;
• Thursday: Australia employment; Canada trade balance; US trade balance, jobless claims
• Friday: US retail sales; U of Michigan sentiment

EUR/CHF Weekly Outlook

EUR/CHF extended recent down trend last week and made another record low at 1.0707. It's possibly losing some downside momentum for the moment, but further decline is still expected as long as 1.1148 minor resistance holds. Current down trend should continue to 161.8% projection of 1.2344 to 1.1404 from 1.1891 at 1.0372 next. On the upside, though, note that break of 1.1148 resistance will suggest short term bottoming and will bring lengthier consolidations before resuming the down trend.

In the bigger picture, whole down trend from 1.6827 (2007 high) is still in progress and in any case, medium term outlook will remain bearish as long as 1.2399 support turned resistance holds. Next target is 200% projection of 1.3833 to 1.2399 from 1.3243 at 1.0375. Nevertheless, break of 1.2399 will be the first sign of bottoming and should bring stronger rebound to 1.3243 resistance for confirmation.

In the long term picture, fall from 1.6827 should be resuming whole down trend from 1993 high of 1.8234. The is some sign of re-acceleration as seen in weekly MACD and break of 161.8% projection of 1.8234 to 1.4391 from 1.6827 at 1.0609 and break will target 200% projection at 0.9141. 

Japan Launches Campaign to Weaken Yen

TOKYO—Japan moved to tackle one of the biggest challenges facing its weakened economy Thursday with a concerted push by both the government and the central bank to bring down the surging yen.

But the staying power of this latest intervention may be limited, as past moves suggest Japan's currency could resume its march higher and continue to hobble its export-driven economy. Furthermore, the yen is just one of many woes facing a Japanese economy that some economists say is key to global growth amid lackluster indicators in the U.S. and Europe.

Japan intervened in the currency market continuously Thursday, selling an undisclosed amount of yen to keep it from reaching new highs. Traders as of Thursday afternoon local time estimated that Japan had spent just under ¥1 trillion, or $12.4 billion. Though market watchers had speculated that other Group of Seven nations might join a long-expected intervention, Tokyo said it acted alone.

Bolstering the government measures, the Bank of Japan said it would pour another ¥10 trillion into the economy through additional easing measures, adding to the central bank's continuing efforts to buy financial assets including government and corporate debt to improve investor sentiment and push down rates. While not directly aimed at foreign exchange rates, adding more money to an economy tends to push down its currency.

By midday European trading the dollar had risen to about ¥80 from ¥77.06 in New York Wednesday. The dollar reached its post-World War II low of ¥76.25 on March 17 following that month's massive earthquake and tsunami.

Japan Finance Minister Yoshihiko Noda hinted Thursday that the government will intervene further if necessary. "We are still [only] halfway through, so I'll sum up the result after this is over," he said.

Some market watchers predicted a long campaign. "What we've seen is a skirmish in what could become a war of attrition," said Robert Rennie, chief currency strategist at Westpac Banking Corp. in Sydney.

Kazuo Hirai, who oversees Sony Corp.'s electronics and videogames business, cheered the move to slow the yen's sudden rise. "The fact that the government intervened in a market where the changes were so rapid is a good thing for Japanese industry as a whole," he said during a meeting with reporters. Added Hiromasa Yonekura, chairman of major business group Nippon Keidanren, "the currency intervention seems slightly late, but [the government] has done well."

Japan's main stock-market benchmark rose 0.2%.

Thursday's currency intervention was the third time in less than a year that the Japanese government has moved to address the strong yen, which makes Japan's key export sector less competitive abroad. But the yen has continued its climb despite Japan's solo intervention in September and a combined G-7 effort that followed the devastating March 11 earthquake and tsunami.

Demand for yen has remained strong despite Japan's massive public debt—which is about twice the size of its gross domestic product—and weak growth prospects. The Bank of Japan's emphasis on near-zero rates and a stable monetary policy make the currency look like a safe haven, drawing investors. Meanwhile, Japanese exporters generate demand by repatriating overseas earnings.

Furthermore, the U.S. and Europe have slashed interest rates to stimulate growth, narrowing the spread between their rates and traditionally low-yielding Japan. That makes dollar-denominated bonds less attractive for global investors.

"I am fairly skeptical about the long-term efficacy of this intervention," said Yunosuke Ikeda, chief forex strategist at Nomura Securities Co. "It all depends on U.S. economic fundamentals and those show no signs of getting out of a soft patch—in fact, the U.S. economy may be in a sticky patch."

To be sure, domestic demand is expected to rise sharply over the next six months as post-quake reconstruction moves into high gear and Japanese consumers shake off their sense of self-restraint. In some quarters, expectations for a V-shaped recovery are key to global growth. "Our call that the global economy will accelerate this summer leans heavily on a strong bounceback" from Japan, J.P. Morgan said in a July 21 report.

Currency appreciation is particularly painful for the Japanese economy because manufacturing still makes up 20% of total economic output, just above Germany's 19% ratio and well above the 13% level in the U.S., according to United Nations data. But Japanese manufactures have become experts at adapting to yen strength by boosting productivity at home and moving more production abroad.

Sony, for example, has sought to offset the high value of the yen by moving more of its cost base to countries where it receives large amounts of revenue, such as the U.S.

However, the appreciating yen still hurts Sony's competitiveness with Korean rivals such as Samsung Electronics Co. and LG Electronics Co. Nomura Securities economist Takahide Kiuchi projects that a rapid 10% jump in the yen during the current fiscal year through March would slash average pretax profits at Japanese manufacturers by 18%.

It has also chipped away at Japan's traditionally fat trade surpluses, once the source of great friction with its trading partners. In the March-June quarter, Japan posted a trade deficit of ¥1.25 trillion, which was the second largest since 1957, according to Nomura Securities.

 

—Megumi Fujikawa, Tatsuo Ito and Andrew Monahan contributed to this article.

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