Dollar Firm ahead of FOMC, Sterling Down after BoE Minutes

Dollar strengths mildly today as global stocks are mildly softer ahead of the highly anticipated FOMC announcement. It's widely expected policymakers will announce something called 'operation twist' -increasing the average maturity of securities holdings by swapping holdings of lower maturities Treasuries with longer ones, after the 2-day meeting. Compared with outright bond purchases (QE3), one advantage of operation twist is that the size of the Fed's balance sheet would remain unchanged and is less unlikely to invoke inflation. 

Sterling is notably lower broadly after BoE minutes revealed that most MPC members thought "stresses of the past month had significantly strengthened the case for an immediate resumption of asset purchases". And "for some members, a continuation of the conditions seen over the past month would probably be sufficient to justify an expansion of the asset purchase program at a subsequent meeting." Markets interpreted that as a signal BoE is opening the door wide for more quantitative easing sooner rather than later. And there are speculation that BoE would start in October with another GBP 50b of asset purchases even though November would probably the more likely timing. In additional Sterling is pressured by data showing larger than expected public sector net borrowing, excluding the temporary effects of financial interventions, of GBP 15.9b in August. That was the highest in record for the month.

The Swiss France remains soft today on speculation that SNB would raise the floor of EUR/CHF to 1.5. Ernst Baltensperger, an adviser to SNB said he considers it's possible and said in an interview that all fundamental data are pointing toward a range of between 1.30 and 1.40. SNB spokesman declined to comment on the speculation yesterday and there is no announcement from SNB so far today.

European Commission President Barroso said that the Eurobond should remain an option to be discussed and should not be excluded. This is seen by markets as a signal that he's softening his stance after facing strong opposition from Germany and France on the idea of Eurobonds. Meanwhile, it's reported that Eurozone debt crisis will be the main subject of discussion in the next G20 meeting, which holds alongside IMF's annual meeting in Washington later this week.

Data from Canada saw CPI jumped more than expected to 3.1% yoy in August while core CPI rose to 1.9% yoy. But the data provides little support to the Canadian dollar. Other data saw Japan all industry activity index rose 0.4% mom in July, trade deficit at JPY -0.29T in August. China leading indicator rose 0.6% in July. Australian Westpac leading index rose 0.5% in July.

GBP/USD Daily Outlook

Daily Pivots: (S1) 1.5678; (P) 1.5713; (R1) 1.5770;

GBP/USD's fall resumes after brief consolidations and drops to as low as 1.5591 so far today. Intraday bias is back on the downside and further decline should be seen to next key medium term support at 1.5344. On the upside, above 1.5747 minor resistance will argue that a short term bottom is formed with bullish convergence condition in 4 hours MACD. In such case, lengthier consolidation would be seen before GBP/USD stages another decline.

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, a test on 1.3503/4229 support zone should be seen. On the upside, break of 1.6618 resistance is needed to invalidate this view. Or we'll now stay cautiously bearish in GBP/USD.

USD/JPY Daily Outlook

Daily Pivots: (S1) 76.27; (P) 76.52; (R1) 76.68; 

Intraday bias in USD/JPY remains on the downside and current fall is still in progress for 75.94 support. As noted before, consolidation from 75.94 should have completed at 77.85 already. Break of 75.94 will confirm resumption of whole fall from 85.51. On the upside, above 76.97 minor resistance will delay the bearish case again and turn bias neutral to extend the consolidation from 75.94.

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.

Economic Indicators Update

GMT	Ccy	Events	Actual	Consensus	Previous	Revised
22:45	NZD	Current Account Balance Q2	-0.92B	-0.69B	-0.10B	-0.09B
23:50	JPY	Trade Balance Aug	-0.29T	-0.01T	-0.13T	-0.16T
0:30	AUD	Westpac Leading Index M/M Jul	0.50T		0.10%
2:00	CNY	Leading Indicator Jul	0.60%		1.00%	0.90%
4:30	JPY	All Industry Activity Index M/M Jul	0.40%	0.50%	2.30%
8:30	GBP	BoE Minutes	0--0--9	0--0--9	0--0--9
8:30	GBP	Public Sector Net Borrowing (GBP) Aug	13.2B	11.4B	-2.0B	-5.2B
11:00	CAD	CPI M/M Aug	0.30%	0.10%	0.20%
11:00	CAD	CPI Y/Y Aug	3.10%	2.90%	2.70%
11:00	CAD	BoC CPI Core M/M Aug	0.40%	0.20%	0.20%
11:00	CAD	BoC CPI Core Y/Y Aug	1.90%	1.60%	1.60%
14:00	USD	Existing Home Sales Aug		4.75M	4.67M
14:30	USD	Crude Oil Inventories		-1.6M	-6.7M
18:15	USD	FOMC Rate Decision		0.25%	0.25%

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.

Daily Report: USD/JPY Recovers as BOJ and MOF Met to Discuss Yen's Strength

The greenback was confined in relative narrow range after yesterday's volatile price actions in thin trading conditions in Asia. After falling sharply against European counterparts yesterday, dollar recovered against most major currencies. USD/JPY edged higher on news of a meeting between senior finance ministry and Bank of Japan officials today and they exchanged views on currency rates. Japanese officials also expressed their concerns over the negative impact of yen strength to the country's export sector. Vice Finance Minister for International Affairs Takehiko Nakao and Bank of Japan Executive Director Hiroshi Nakaso held a meeting at the BOJ headquarters, giving a sign to the market that Japanese officials are ready to take further action to curb yen's rise. The official made comment after the meeting that both BOJ and MOF will work as a team to deal with the yen's strength. Similar meeting between the BOJ officials and Senior member of MOF was held before also in August 2010 discussing the same topic, the two organizations gave a joint statement warning markets against excessive yen volatility last time but no plan for such statement yet according to BOJ spokesman. With the USD/JPY trading comfortably below 77.00 for more than a week, more and more traders are expecting the currency pair to hit record low of 76.25 soon (later this week or next week the latest), some dealers suggest it needs to clear stops and option barriers below 76.25 first before hitting decent size bids below 76.00, then the greenback would have the power to stage a real rebound back to 77.00 and even 78.00 level. Market liquidity may improve next week when most Japanese investors and traders return from their summer holidays (O-Bon holidays), however, one should note that exporters may also resume their selling of dollar for month end transactions. At the moment, it looks like orders in EUR/JPY are working the round with offers in good size at 111.00-10 (stops above) whilst bids are also reported protecting stops below 110.00.

Although the single currency rose quite sharply yesterday from 1.4325 to a 3-week high of 1.4517, traders found it very difficult to push euro further north with recent releases of soft growth and production data in eurozone. Comments from ECB's council member Ewald Nowotny also seen pressured the single currency as he expressed in an interview with newspaper on his fears of a phase of low growth rates and low inflation in the eurozone, He said growth has slowed more than expected in the region with the debt problems, he also indicated that it is too early to make decision about implementing eurozone bond. In order to solve the regional debt problems, he would prefer to prioritize the implementation of policies agreed earlier in July meeting. EUR/USD gave back over half of yesterday's advance partly due to risk-off trades as most Asian equities are in red zone, bids at 1.4390-00 were filled. Option maturity today include 1.4250, 1.4225 and 1.4500 all NY cut.

The British pound traded with a relatively firmer footing as dealers await the release of UK July retail sales data, as indicated in our previous update that some traders are betting the number to show better-than-expected readings due to the boost from Royal Wedding.

The Swiss franc remained locked in familiar range after yesterday's disappointment from SNB, however, USD/CHF and EUR/CHF just rebounded in European morning on talk of SNB injecting liquidity into the market, in line with what the central bank said it would do yesterday. USD/CHF quickly bounced from 0.7891 to 0.7991 and EUR/CHF also jumped sharply from 1.1370 to 1.1515. At the moment, there are also rumors of rate checking by SNB.

On the data front, in addition to the indicated UK retail sales data, focus will be on the release of U.S. existing home sales figure (14:00GMT) and more importantly the July CPI data at 12:30GMT with market consensus centered at 0.2% m/m and 3.3% y/y, core CPI at 0.2% m/m and 1.7% y/y.

USD/JPY Daily Outlook

Daily Pivots: (S1) 76.37; (P) 76.60; (R1) 76.80; 

USD/JPY is still staying in tight range for the moment and intraday bias remains neutral. No change in the outlook that further decline is expected with 77.32 minor resistance intact. Break of 76.28 will confirm resumption of the whole decline from 85.51 and should target 100% projection of 81.46 to 76.28 from 80.23 at 75.05 next. On the upside, above 77.32 minor resistance will bring stronger recovery. But we'll stay cautiously bearish as long as 80.23 resistance holds.

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 revive the case that USD/JPY's down trend has finished. Otherwise, we'll stay cautiously bearish in the pair.

USD/JPY Daily Outlook

Daily Pivots: (S1) 81.50; (P) 82.01; (R1) 82.39; 

Intraday bias in USD/JPY remains on the downside with 82.17 minor resistance and further fall should be seen towards 80.93/81.12 support first. Decisive break there will strong suggests that consolidation pattern from 80.29 is completed at 83.96 already and should send USD/JPY through 80.29 low. On the upside, above 82.17 minor resistance will turn bias neutral to extend recent choppy sideway trading.

In the bigger picture, with 85.92 cluster resistance (38.2% retracement of 94.97 to 80.29 at 85.89) intact, there is no confirmation of reversal yet and the longer term down trend in USD/JPY is possibly still in progress for another test on 79.75 (1995 low). Decisive break of 79.75 will target 61.8% projection of 94.97 to 80.29 from 84.49 at 75.41 next. On the upside, break of 84.49 resistance, though, will argue that a medium term bottom is likely formed and will turn focus back to 85.92 cluster resistance for confirmation.