USDCHF - Cautiously Bullish above 0.8949.

A third negative daily performance in succession was posted by USDCHF Tuesday as this week's reaction to last week's gains continued. The net downside is not extensive and the lows were not maintained with some demand returning ahead of 0.8900. The resulting bounce leaves immediate signals for sentiment mildly positive and so although gains are currently assessed as temporary our call is Cautiously Bullish above 0.8949.

The immediate objective is 0.9017, yesterday's open, with a move beyond that point targeting yesterday's 0.9059 high or even 0.9082.

Selling through 0.8949, is the risk to this call as it signals that buying pressure is weaker than currently assessed. The market should then decline to 0.8925, yesterday's low, then 0.8876, the open from Sep 21st.

US Dollar Outlook Remains Highly Constructive in Current Enviornment

• EconFin meeting disappoints; Euro back under pressure
• Strauss Kahn intimates that Greek default is inevitable
• French banks could be exposed to UBS rogue trading incident
• WSJ article talk of a more balanced Federal Reserve than markets are looking for
• Yen at risk for depreciation as government set to unveil plan to deal with strong currency

Any hopes for some form of a constructive resolution to the Eurozone and Greek debt crisis over the weekend, were sorely disappointed after the EconFin meeting failed to produce any significant results. The expectation that things need to get done, and fast, is incredibly high and so long as these expectations are let down, we should see a quick deterioration in sentiment. It is therefore no surprise to see the Euro and risk correlated currencies tracking lower into early Monday. Adding insult to injury have been comments from ex-IMF Director, Dominique Strauss Kahn who basically concedes that Greece will default on its debt obligations. Additional factors seen weighing on the markets have been UBS raised estimates of losses from unauthorized trades executed by rogue trader Kweku Adoboli. A WSJ article cites someone close to the story who says that French banks may be among the counterparties to the fake trades.

Relative performance versus the USD on Monday (as of 10:00GMT)

1. JPY +0.01%
2. CAD -0.39%
3. GBP -0.41%
4. NZD -0.89%
5. CHF -0.91%
6. EUR -0.99%
7. AUD -1.19%

On the other side of the ocean, yet another WSJ article is gaining some traction early Monday after Jon Hilsenrath talks about the on goings at the Fed and future policy considerations. The article suggests that the Fed is more reticent than many might have thought towards its ultra accommodative bias, and failure to discuss QE3 or other radical stimulus measures should be all the more concerning to those in the dovish camp. At the end of the day it is very difficult to determine just where the chips will fall at the next meeting, but this article certainly does a good job of painting a picture which potentially could open the door for repositioning back in favor of the USD on a less aggressive accommodative central bank outlook.

Elsewhere, despite the uptick in risk aversion and flow of funds back into safe haven bids, the Yen tracks lower against even the buck, with market participants perhaps less inclined to be buying Yen on the news that the Japanese government is expected to unveil its interim plan to deal with the strong Yen early this week. It looks as though the government is now trying to consider the implementation of softer and less aggressive measures to weaken the local currency rather than resorting to aggressive intervention tactics. In our commentary from the previous week, we continue to like the idea of selling Yen aggressively at current levels, with the currency trading by record highs against the buck and due for a major cyclical reversal over the coming weeks and months. We do not see the lure of the Yen as a safe haven currency and anticipate that any additional flows into the currency from the recent measures taken by the SNB will be highly unwelcome.

All of this continues to translate into a highly favorable outlook for the US Dollar, which we expect will be the primary beneficiary from safe haven flows going forward. The Franc and Yen are no longer viable options and the ongoing deterioration within the broader global macro economy demands a flight to safety back into the highly liquid US Dollar. While the following argument isn’t necessarily relevant right now, we also see the US Dollar in a position to benefit on any upside reversal to global growth prospects, with the rebound in the global economy to likely force a material narrowing in yield differentials back in favor of the buck as the Fed looks to reverse its ultra accommodative policy.

Looking ahead, the calendar is exceptionally light in North America, with the only release coming in the form of NAHB housing due at 14:00GMT. US equity futures are tracking a good deal lower and point to an open of some 1.50% in the red. Commodity market price action is jiving well with familiar correlations and market themes with oil a good deal softer and gold managing to find some renewed safe-haven bids.

ECONOMIC CALENDAR

TECHNICAL OUTLOOK

EUR/USD: The sharp pullback below the July lows and establishment below the 200-Day SMA solidifies the prospects for the carving of a major lower top on the monthly chart which now ultimately projects additional declines down towards the 1.2000 area over the coming weeks and months. The latest inter-day rally off of the 1.3500 area lows has stalled out within our projected lower top region between 1.3835 and 1.4055 and a break back below 1.3500 will confirm the lower top at 1.3940 and accelerate declines down towards 1.3000. Ultimately, only back above 1.3940 delays outlook and gives reason for pause. 

USD/JPY:This is a market that looks like it trying very hard to establish some form of a base after recently setting fresh record lows just under 76.00. Although the downtrend remains intact and has been fairly intense, longer-term studies welcome the prospects of the formation of a material base and shift in the overall structure. Price action over the past several days has been confirming, with the market very well supported in the 76.00’s and unable to extend the downtrend to fresh record lows. Instead, the break back above 77.00 is looking more and more constructive, with the weekly chart also showing bullish tendencies after quietly putting in three consecutive positive closes. From here, we look for the establishment back above the 50-Day SMA at 77.90 to reaffirm our recovery outlook and accelerate gains towards next key resistance by 80.25 further up. Ultimately, only a daily close back below 76.50 would give reason for concern.

GBP/USD: Overall price action seems to suggest that this market could once again be looking to roll over in favor of some fresh medium-term declines. Any gains in recent months have proven to be very well capped above 1.6500, and this latest break back below 1.5780 opens the door for a pick-up in bearish momentum towards key support by 1.5345 further down. Any interday rallies are expected to be well capped below 1.6000, while ultimately, only back above 1.6500 would give reason for concern. 

USD/CHF: A recent acceleration of gains beyond critical resistance and a previous lower top at 0.8550 confirms bullish bias and from here, we see room for fresh upside above 0.9000 and towards 0.9500 over the coming days. Look for any setbacks to be well supported above previous resistance now tuned support at 0.8550 on a daily close basis, while ultimately, only back under 0.8200 would delay. A break and close back above the 200-Day SMA for the first time in several months will provide more ammunition for our highly constructive outlook.

 

Written by Joel Kruger, Technical Currency Strategist

 

If you wish to receive Joel’s reports in a more timely fashion, email jskruger@dailyfx.com and you will be added to the distribution list.

        

Big picture G10 Currency Charts

The charts below are for each of the G10 currencies versus an evenly weighted basket of the remainder of their G10 peers. The charts are small (as we work on updating the blog to allow links to larger graphics), but they nonetheless do cover quite a bit of ground – 2500 data points for each in fact, which hopefully gives an interesting perspective. Each of the time series starts at indexed 100 as of early February 2002. (The start point of the index changes with every refresh of the charts on  a rolling basis.)

Note that the charts were cut before the last leg of the action in the early US session after the news that Stark will resign from the ECB (rumored because of disagreements on bond buying) and on news ECB will back off on penalty rates for banks accessing emergency facilities.

USD

The US dollar has been dropping forever – note that while the dollar index crossed the 200-day moving average, the USD/G10 basket has not yet crossed this important level, though it is trading at the highest level in months and may be confirming a transition to a bullish trend after the recent basing action and loss of downside momentum.

EUR

How ironic is it that, as the EU is experiencing its worst existential crisis to date, the Euro is back close to its lowest levels in years….which are also the lowest levels since the Euro was launched amid intense skepticism over the entire idea of a single currency back in 2002.

JPY

The JPY remains resilient and relatively strong – but will likely only be so as long as rates remain absurdly low and/or the BoJ and Japanese government steal a page from the SNB’s book on the intervention front

GBP

GBP is experiencing a bit of a revival on Euro misery and as its down trend has been losing steam for a long time. Could the market be getting too complacent on further GBP weakness?

CHF

The magnitude of the run-up and the subsequent reversal is breathtaking, but leaves us, amazingly, still poised above the 200-day moving average! There’s a lot more room for franc weakness if the SNB’s intervention project succeeds.

AUD

AUD is extremely overvalued if the Asian growth story in any way derails. The focus has been intense on Europe, but many risk appetite signals are flashing around the world, which are most often associated with Aussie downside. Aussie hasn’t been garnering sufficient notice.

CAD

CAD has been a relatively low beta currency over the years relative to some of its peers. It is generally out of favor now, but could put up a fight or at least avoid broad weakness if the US economy and USD prove stronger than the market is currently expecting.

NZD

The NZD bull market has enjoyed an Indian summer, but it may fade on the potential for an Asian hiccup and if the post NZ earthquake GDP bump fades in the months ahead.

SEK

The krona is gaining favor as a safe haven from Euro turmoil. It may rally passively for a while, but historically has a hard time if its export markets are threatened.

NOK

NOK is very credible as a safe haven from a fundamental standpoint and has room to rally further, but what point does the Norges Bank begin to rattle it saber when EURNOK is already at almost decadal lows?

EURCHF and Dollar Index to soar as we head to global QE Extreme

The chart below shows why the new SNB EURCHF floor could be of extreme importance. I am just back from yet another trip to Zürich and I found people extremely bullish on CHF – with talk of corporates wanting to sell, sell, sell etc. But franc bulls need to pause a moment to consider the following few points:

• The SNB has an ‘unlimited ability to print money’
• The SNB is worried about deflation – hence the need to monetize
• The bias is far too complacent on the direction for the CHF, with more than 95% on the bullish side

• The SNB is clearly committed and feels there is no alternative and perhaps even more importantly, they have full political backing from the government.

Source: Bloomberg LLP and Strategy and Research

 

I have two strong view for the next 12 months:

1.       A much stronger US Dollar - DXY to 100 (now 75.00)

2.       A much higher EUR vs CHF - to 1.40/1.50

The scenario for much stronger US dollar:
The view on the greenback strengthening is based on a  too low consensus on US growth, better than ‘announced’ jobs and consumer spending data. Finally, the US will become competitive inside next two years on unit labor costs. Add to that the fat tail risk of HIA 2 being introduce- and the rest of the G-20 moving toward the same kind of QE measures we have seen from the US Fed – why should only the USD be punished for QE when “everyone is doing it?” (see more below)

 

The Scenario for a much higher EUR/CHF

The SNB has no alternative, Switzerland is headed full steam into “Japanisation” without extreme measures that include a major change in the “expectation curve” when we see 1.30 plus in EURCHF. Also, investors will have to cover massive losses from selling EUR calls. Finally, inside the next 12 months we will have some kind of a “resolution” on the EU debt crisis.

 

Macro themes
There are really only three ways to deal with the current situation:

1. Accept Crisis 2.0 – deleveraging and pain, but also better for longer term restructuring – unlikely accepted by policy makers but more likely from a market perspective.
2. Accept Japanisation – deflation, slow-growth and no structural changes.
3. Go to QE Extreme/Maximum Intervention – betting that the ‘weather’ will improve by spending ever more money and making very gradual structural changes. The Keynesian economists/advisers are again getting upper hand as they now can claim (wrongly!) that the reason we did not get back on track is because we did too little, too late – similar to Japan. This is the route the G-20 will move to for now. I see all major nations in QE Extreme/Maximum Intervention mode by the halfway point of 2012.

 

By the way, more specifically on the current EuroZone crisis: Greece going bankrupt is not a fat fat-tail event (Black Swan), it’s the most expected outcome ever!

 

If Greece leaves the EU,  it will lead to a major “risk on” scenario as Europe will have regained the initiative, so if the Euro-zone’s next development is a break-up from the weak (Greece) then it’s good for risk – if it’s a break-out from the strong (Finland or Germany) it’s Crisis 2.0 extreme. Chances? 50/50

 

That’s it for now – I’m off to Spain and the Vuelta and some fact-finding,

 

Have a nice week-end

 

Steen

Daily Report: Risk Rally Continues Cautiously as Manufacturing Data in Spotlight Today

Risk rally extend mildly today but investors are generally cautious ahead of some important manufacturing data today. Appetite for risks is also dampened mildly by slightly weaker than expected China Manufacturing PMI as well as the surprised rate cut from Brazilian central bank. Euro and sterling are mildly softer as dragged down by rebound in Swiss Franc in EUR/CHF and GBP/CHF. Also, commodity currencies are also losing some upside momentum against the greenback.

Manufacturing data will be a key focus today. China PMI recovered from 29 month low of 50.7 to 50.9 in August but was slightly below expectation of 51. Eurozone manufacturing PMI finalized release will be released in European session today and is expected to be unrevised at 49.7 UK manufacturing PMI is expected to rise slightly to 49.5. Swiss SVME PMI is expected to dropped to 51.2 in August. US ISM manufacturing is expected to dropped to 48.5 in August. If inline with expectation, all, Eurozone, UK and US manufacturing PMI will be below 50, which suggests mild contraction ahead and will raise of risk that the global economy is entering back into recession. Other data to note include Australia retail sales, which rose slightly more than expected by 0.5% mom in July. Swiss Q2 GDP, retail sales, US jobless claims, non-farm productivity and construction spending will also be featured.

Swiss Franc remains firm as markets believe SNB won't intervene for the time being. Switzerland's Economy Minister Johann Schneider-Ammann said yesterday that the country have to "keep living with the strong franc for some time. It must be a combination of measures that will lead us into the future." Meanwhile, the Swiss government also pledged to use CHF 870m for an economic stimulus package to lessen the impact of the strength in Swiss Franc, aiming at supporting tourism, and exports. Technically, USD/CHF, EUR/CHF and GBP/CHF seem to have made short term tops earlier this week and are likely to pare back some of the strong intervention inspired gains. Nevertheless we'd be cautious in particular when EUR/CHF dips back below 1.1 level. It's still believed that SNB is determined to defend parity in EUR/CHF.

While risk appetite remains firm so far, we'd like to point out that stocks should be facing strong resistance in near term and investors would start to be cautious at current level and would likely weight for September's FOMC meeting for Fed to announce new stimulus. 55 days EMA in DOW at 11771 and 11862 resistance should hold in near term at least and traders will use every reason for profit taking, including possibility of poor ISM today and NFP tomorrow. 

EUR/CHF Daily Outlook

Daily Pivots: (S1) 1.1452; (P) 1.1651; (R1) 1.1778; 

Considering bearish divergence condition in 4 hours MACD, EUR/CHF might have made a short term top at 1.1971. Intraday bias is cautiously on the downside for the moment and sustained break 4 hours 55 EMA (now at1.1555) should bring deeper pull back to 1.1163 support and below. On the upside, though, above 1.1971 will extend the strong rebound from 1.0061 towards 1.2399 medium term support turned resistance next.

In the bigger picture, the strength of the rebound from 1.0061 argues it's a medium term bottom and EUR/CHF has turned into a phase of medium term consolidation. Sustained trading above 55 days EMA should bring stronger rise back to 1.2399/3243 resistance zone but strong resistance should be seen there to bring reversal. On the downside, decisive break of parity is needed to confirm down trend resumption. Otherwise, we'll now stay neutral in the cross and expect some more consolidations above there. 

Economic Indicators Update

GMT	Ccy	Events	Actual	Consensus	Previous	Revised
22:45	NZD	Terms of Trade Index Q/Q Q2	2.30%	0.60%	0.90%	0.80%
1:00	CNY	PMI Manufacturing Aug	50.9	51	50.7
1:30	AUD	Retail Sales M/M Jul	0.50%	0.30%	-0.10%
5:45	CHF	GDP Q/Q Q2		0.40%	0.30%
6:00	EUR	German GDP Q/Q Q2 F		0.10%	0.10%
7:15	CHF	Retail Sales (Real) Y/Y Jul		4.60%	7.40%
7:30	CHF	SVME-PMI Aug		51.2	53.5
8:00	EUR	Eurozone PMI Manufacturing Aug F		49.7	49.7
8:30	GBP	PMI Manufacturing Aug		49.5	49.1
12:30	USD	Initial Jobless Claims		409K	417K
12:30	USD	Unit Labor Costs Q2 F		2.30%	2.20%
12:30	USD	Non-Farm Productivity Q2 F		-0.50%	-0.30%
14:00	USD	Construction Spending M/M Jul		0.10%	0.20%
14:00	USD	ISM Manufacturing Aug		48.5	50.9
14:00	USD	ISM Prices Paid Aug		55	59
14:30	USD	Natural Gas Storage		61B	73B

Daily Report: Dollar Broadly lower on Expectations Fed May Take Actions in Sept

The greenback remained under broad-based selling pressure except against the Swiss franc after Friday's Jackson Hole central bankers gathering on speculation that Federal Reserve may take more monetary policy action next month. Although Fed Chairman Ben Bernanke provided no hints or details of any QE3 to support U.S. economic recovery last Friday in the central bank's annual symposium, he did say the central would extend its September FOMC meeting to 2-day to have more time for discussion on its options. As Bernanke also indicated the Fed is prepared to employ its tools as appropriate to promote a stronger recovery, traders are betting the central bank to announce new stimulus in September extended policy meeting. Another factor pushing the single currency higher to above 1.4500 level was a report from Sunday Times that officials from the ECB are considering to offer central guarantees over debt issued by banks. Having said that, some analysts are not convinced for the euro is able to head too far north partly due to the eurozone debt crisis and remarks from IMF's Lagarde who warned that the global economy is slowing down and in a dangerous phase. There are also rising concerns that eurozone debt crisis are spreading to the European banking system. Nevertheless, with Swiss National Bank keeps appearing to support and EUR/CHF and USD/CHF, euro's downside is likely to be limited at the moment. Offers at 1.4500 were cleared and stops at 1.4550 are within range with mixture of offers and stops tipped further out at 1.4600. Funds and UK names were seen buying euro this morning and bids are reported at 1.4500 and 1.4470.

Another focus for today is the selection of new Japan's Prime Minister, news just came out that former Finance Minister Yoshihiko Noda has been chosen by the ruling Democratic Party of Japan to be the party's leader, hence Noda is set to become Japan's next prime minister. Not much reaction yet in the spot market as traders still await new set of policies and measures to be announced by the new administration on how to stem yen's strength and handle the impact on Japanese economy. Despite surging to as high as 77.00 last week on expectations that Bernanke won't hint on QE3, the USD/JPY fell back to the launching pad last Friday to as low as 76.50. Exporters are still the major selling at the level around 77.00. Therefore, unless Japanese authorities show up again like earlier this month on 4 Aug for another round of yen selling intervention, it would be quite difficult to see USD/JPY trading comfortably above 77.00 level with offers from exporters lining up all the way from 77.10 up to 77.80 (every 10-points interval).

Meanwhile, the Swiss franc is the only major currency that traded lower against the greenback last Friday. Swissy rallied late last week in part due to the release of weaker-than-expected Swiss KOF leading indicator, plus remarks from Swiss Union saying that the franc is ‘massively overvalued'. Obviously there were rumors that the SNB took action to sell Swiss franc, USD/CHF and EUR/CHF rallied to as high as 0.8159 and 1.1735 respectively. Stops above 0.8020, 0.8040 and 0.8100 were finally cleared, although price then retreated from 0.8159, with SNB still sneaking around the corner, downside should be limited and bids are reported from 0.8050 down to 0.8030 and also at 0.8000. Traders definitely see the determination of the Swiss authorities to weaken the Swiss franc, there is also market talk that Swiss banks may start charging offshore CHF deposits which should also dampen the demand for franc.

Elsewhere, aussie continued to surge since last Friday on buying by real money accounts and big Japanese names, cleared offers ahead of stops at 1.0600, active buying in AUD/JPY by Japanese margin traders also seen helping to lift aussie. Although new home sales fell for the second straight month, the number also supported AUD as these weaknesses in housing and new home market leave room for RBA not necessary to cut rates in the meantime.

EUR/USD Daily Outlook

Daily Pivots: (S1) 1.4383; (P) 1.4442 (R1) 1.4556; 

EUR/USD's break of 1.4537 resistance is taking as the first signal that the pair is finally breaking out of recent consolidations. Intraday bias is cautiously on the upside for 1.4695 resistance first. Break will affirm the bullish case and target 1.4939 high and above. On the downside, though, below 1.4328 minor support will dampen this bullish case and indicate that consolidation from 1.4939 is going to extend further with another falling leg to 1.4054 and below.

In the bigger picture, EUR/USD is still trading above medium term trend line support from 1.1875 (now at 1.3941) and thus, rise from there should still be in progress. Break of 1.4939 should confirm rally resumption and should send EUR/USD through 1.5143 resistance towards 1.6039 high. However, considering that weekly MACD has been staying below signal line for some time now, a break below 1.3837 will have the trend line support, as well as 55 weeks EMA firmly taken out. That would argue that the rally from 1.1875 has indeed finished and will bring deeper fall towards 1.2873 support and possibly below.

Economic Indicators Update

GMT	Ccy	Events	Actual	Consensus	Previous	Revised
	EUR	German CPI M/M Aug P		0.00%	0.40%
	EUR	German CPI Y/Y Aug P			2.40%
12:30	USD	Personal Income Jul		0.30%	0.10%
12:30	USD	Personal Spending Jul		0.50%	-0.20%
12:30	USD	PCE Deflator Y/Y Jul		1.40%	2.60%
12:30	USD	PCE Core M/M Jul		0.20%	0.10%
12:30	USD	PCE Core Y/Y Jul		1.40%	1.30%
14:00	USD	Pending Home Sales M/M Jul		0.00%	2.40%

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.

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.

Humdinger of a day expected by markets Friday

Pretty quiet this last week in the UK really, with few economic releases of any substance - lacklustre retail sales figures, mixed CBI surveys, (orders better than expected, but sales worse), the Prime Minister even felt able to return to his holiday!

On balance, sterling suffered a little against the dollar and the euro, falling by about 1% against both - maybe because the pound has become a newly annointed safe-haven currency over the recent frenzied months, due to the UK's apparent strict fiscal probity, and this week safe havens of many types were ditched as hopes for QE3 grew, taking equities tentatively higher.

I would be tempted to fade these moves as, even if Bernanke does signal that QE3 is just around the corner, we'll see a very graphic example of the law of diminishing returns, as I believe the market will quickly re-focus upon the Eurozone debt disaster waiting to happen. If he doesn't deliver, and just does the minimum - which will be a verbal guided tour through the various easing options at the Fed's disposal should they need them - then it's 'goodnight Vienna'; risk will be spurned like a rabid dog, and Sterling will be off to the races again.

We're still in a deflationary, debt-trapped world in the West, with the UK being a prime example, and this time next year we'll look back longingly on 2.7% gilt yields.

Tomorrow should be a humdinger of a day, with UK GDP figures, (the Office for National Statistics' second guess, so shouldn't surprise) and, of course, Bernanke on stage tomorrow late afternoon UK time - a must-watch, but I can't see him changing the world by too much, for too long.

Decisive Week Seen Bringing Maximum Intervention Closer

After another week of volatility this one sets to be more of the same with plenty of unanswered questions and investors still desperately looking for direction from politicians and central bankers alike. The biggest drawcard is the meeting of global central bankers at Jackson Hole later in the week but the question is: will markets get the answers they need to pull things out of just that - a hole, which just seems to be getting deeper.

The cartoon below pretty well sums up the situation for the Euro right now. Germany's Merkel and France's Sarkozy, though united in the cause, are pretty much fighting what looks like a loosing battle to protect the Euro. Germany in particular continues to play hard-ball on Eurobonds as it seeks debt-breaks constitutionalised in the European Union.

 

Source: FT.com

European peripheral stew getting hotter
Other developments concerning the European periphery are stewing in the background and there's no need for chilli - things are hot enough to burn investors' mouths already! Here's a taste:

• A little over a week ago Greece released data showing its economy contracted by 6.9 percent in the second quarter and consensus expectations are for minus 5 percent growth for the whole year. This doesn't bode well ahead of the all important visit this week by the "Troika" (the International Monetary Fund, the European Central Bank and the European Commission) which will assess Greece's progress to determine if it can receive its next tranche of bailout loans. Meanwhile Finland has denied further payment to Greece before it gets collateral. This outright refusal could stall the second payment and is now broadly referred to as the Finland-clause, which both Austria and Holland are likely to join. This represents a major “break-down” in EU commitment and the Finnish clause combined with the existing German one tells us it is only a matter of time before the funding for banks dries up.
• Italian banks borrowed EUR 80 bln last week from the ECB. This is the first time they have had to go to Frankfurt to fund themselves. The overall European bank funding dependence is between 3/2 to 1 in deposits to assets.
• Spanish and French banks Credit Default Swaps (CDS) are now wider than during the 2008 financial crisis. 

 

Source: Bloomber LLP & Saxo Bank

The increased tension in interbank rates can be seen by increased deposits under the European Central Bank's “deposit facility” where 90 bln. EUR was parked last Thursday. (This make no sense unless you don't want to lend out to other banks!)

Japanisation increases QE likelihood
Talk over the weekend was about "Japanisation" as US yields (10 year) broke 2 percent. (Japanese yields have never for any sustained period risen above the 2 percent level they broke in 1996! Furthermore Japan has seen decades of deflation, no-growth, no-productivity and a move from equity to bond risk in investors' portfolios. The Nikkei 225 is still 75 per cent below its peak from 1989.)

Oversold ahead of Jackson Hole
The market is extremely oversold going into the Bernanke-week or Jackson Hole week with 42 bln. US dollars having been pulled from equity funds so far this month, which is the most since February 2009 (the low in the S&P was in March 2009 at 666). Since May and the announcement of exiting from Quantitative Easing (QE) 110 bln. USD has been withdrawn from equities.

Japan's lost decades and forcing FOMC's hand
Going into Jackson Hole one needs to take into account the way Federal Reserve Chairman Ben Bernanke thinks. Do not forget that when he talks about Japan’s lost decades he thinks it was due to inactivity, too little too late in terms of printing/asset buying. With growth forecasts now at 1 per cent or below for the second half of 2011 it is absolutely clear to me that he will force the hands of the Federal Open Market Committee (FOMC). He may not get full support, but he firmly believes in QE and OT (Operation Twist). His reputation is on the line, and changing course would be detrimental to his “academic image” – hence the odds are increased for QE3 – and not OT in my opinion.

Maintaining the illusion
We are constantly bewildered about how bureaucrats and politicians are prepared to do anything, and I mean anything to keep the illusion going. The lower the S&P goes this week the more likely it is we will see a fully fledged QE3 – and OT. Maybe even both!

It’s worth noting one key change since last week: The dividend yield on the S&P500 is now higher than 10-year US bonds. This is by no means a call to go long stocks yet, but clearly holding one basket of S&P500 stocks rather than a 10-year US bond for the next 10 years seems a more interesting tactic. (Having said that the analogy to Japan is tempting as the 10-year bond currently yields 0.99 per cent.)

US 10 year yield 2.08 Per cent (Source: Bloomberg LLP)

 

S&P500 Dividend yield (Source: Bloomberg LLP)

 Strategy
We are entering extreme oversold conditions where EU politicians have reached a new low in terms of verbal nonsense and there is growing  tension in funding markets. This calls for desperate measures and actions and this week could set the direction for the reaminder of the year. We called Q3 Maximum Uncertainty in our Q3 outlook – for now my Q4 title is set to be: Maximum Intervention (subtitle: end of the managed economy - dirigisme.)

Keep the powder dry: the Swiss Franc, US and German yields are out of sync with reality. Fear is the norm, and averaging into equity exposure could be the name of the game from here.

Daily Report: USD/JPY Bounces from Fresh Record Low on Intervention Fears

After hitting a fresh record low of 75.94 last Friday, the greenback finally rebounded this morning to a 1 ½ week high of 77.23 on active buying by an U.S. name (on behalf of a Japanese institutional investor), However, the currency pair ran into heavy offers by exporters and has retreated back around 76.70/75 due to lack of real action from Japanese officials. Although Ministry of Finance and even Japan's Prime Minister both came out and warned about the one-sided move in Japanese yen, as comments were pretty much the same as before, i.e. excessive Yen rise has a negative impact on the economy and the government is ready to take decisive action against any speculative and excessive moves if necessary, not much effect on the FX market, Finance Minister Noda added that it is too early to reach a conclusion on the BOJ/MOF intervention earlier this month (4 Aug), however, traders need something more solid in order to stop them from buying the Japanese yen. Over the weekend, a report from Nikkei business daily (Nikkei Shimbun) suggested that the Japanese government was considering intervention plus a comprehensive set of policy measures to stop the rise in yen which is dampening the nation's economy. The article indicated once Prime Minister Kan steps down, new measures will be implemented, studied easing measures include providing support to make high value-added product, expanding low interest loans to small and mid-size businesses and third supplementary budget. Another factor pushing the yen higher was risk aversion with weakness in global equity markets last Friday (Hang Seng and Nikkei 225 are still in red zone). Although some traders expect the USD/JPY to rally like the USD/CHF after the government announces new set of easing policy and intervenes the currency market again this week, if the intervention by BOJ/MOF remains unilateral, impact on the currency pair will still be short-lived. At the moment, bids from importers and U.S. banks are reported at 76.25-30 and 76.00 whilst offers from exporters remain from 77.00 all the way up to 77.50.

Although aussie rose in tandem with euro last Friday to a high of 1.0482, the currency pair met good selling by an Asian fund and pressured AUD/USD back to around today's low of 1.0363. Comments from Australian Treasurer Wayne Swan also seen undermining aussie as he said the high Australian dollar was placing tremendous pressure on trade exposed industries. Risk aversion led selling in AUD/JPY also drag aussie lower today with offers now reported in the region of 1.0440-60 (stops above 1.0475-85 and further out at 1.0520) whilst bids (also in AUD/NZD and AUD/JPY) from Japanese marginal traders, European names and real money investors are tipped at 1.0330 and 1.0300.

Against the European currencies, euro retreated from Friday's high of 1.4453 and locked in narrow range in part due to contradict comments from EU officials. ECB's governing member Nowotny was quoted in an Austrian magazine that he is fearing EMU states will not adopt EFSF revisions by end of October. On the other hand, German Finance Minister Schaeuble gave more upbeat remarks as he said the euro remains a stable currency and market correction on the downside has been exaggerated, there is no reason for lasting concerns. He also comments on German economy, indicating there is no sign of a recession and the country's labor market is very positive. This week's focus will be on peripheral yields in particular Greece, countries including Netherlands and Austria insisted on receiving collateral against their bailout loans. Once again the Swiss newspaper, SonntagsZeitung claimed that the Swiss government expects the Swiss National Bank to set the target for EUR/CHF peg at 1.2000 or above. The report also suggested that there are increasing pressure on SNB to take further action to weaken the Swiss franc.

Despite rising to a 3 1/s month high of 1.6618 last Friday (on the release of better-than-expected UK public finance data at -2.0 billion GBP), cable then retreated and gave back most of Friday's gain on speculation that Bank of England may expand the QEP. No data is due today with a light orders book, bids from UK clearer are reported at 1.6430-40 whilst offers are noted quite far at 1.6540-50.

USD/JPY Daily Outlook

Daily Pivots: (S1) 75.99; (P) 76.48; (R1) 77.02; 

The strong recovery today and break of 76.96 minor resistance indicates that a temporary low is formed at 75.94 and intraday bias is turned neutral. Some consolidations would be seen above 75.94 first and stronger recovery might be seen. But after all, we'll stay bearish as long as 80.23 and expect more downside ahead. Break of 75.94 will 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.