Daily Report: Currency Markets Calm While Risk Aversion Dominates Markets

Risk aversion continues to dominate the financial markets in Asian session today. Following the nearly -420 pts fall in DOW, Asian equities are broadly lower with Korea KS11 down most by more than -5%, Australian all ordinaries down -3% while Japan Nikkei, Hong Kong HSI and Singapore Straits Times all down more than -2%. Gold manages to ride of safe haven flow and jumps to new record high close to 1850 level against dollar. The current market is relatively calm though. Dollar and yen are generally firm but markets are stuck in tight range so far.

Concerns on European banking sectors and global slowdown are the two major factors for the bearish sentiments in the markets, the former being a near to medium term while the latter being the medium to longer term. Investors are on the one hand clearly dissatisfied with the lack of feasible solutions for the debt crisis out of the Franco-German summit. The proposed imposition of a new financial transaction tax across all Eurozone members even did irritate some investors. On the other hand, markets are concerned with the possibility of liquidity dry up in the interbank lending markets due to lack of trust. 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.

Meanwhile, markets are deeply concerned with slow down in the US after getting some poor economic data recently. All eyes will be on next week's Jackson Hole symposium and that might help keep downside of stocks contained in near term. 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. 

As for today, Canadian CPI will be a main focus. Economists expect headline CPI to moderate from 3.1% yoy to 2.8% yoy in July while core CPI is expected to rise from 1.3% yoy to 1.6% yoy. USD/CAD looks breaking out from recent triangle consolidation and a lower than expected figure today will likely trigger further rally through parity. Other data to be released include German PPI and UK public sector net borrowing.

A near term focus of the markets will be on how far gold could go, not just against dollar, but also against other currencies. XAU/EUR just makes another record high at 1291.67 today. The up trend has been accelerating after breaking of the upper rising trend line and momentum is still very strong in the pair. We'll stay bullish in XAU/EUR as long as 1201.96 support holds and expect a break of 1300 psychological level in near term. The up trend should also extend to 261.8% projection of 954.11 to 1088.1 from 1021.21 at 1371.96 in medium term. 

USD/CAD Daily Outlook

Daily Pivots: (S1) 0.9821; (P) 0.9880; (R1) 0.9961; 

Intraday bias in USD/CAD remains cautiously on the upside for a retest on 1.0009 resistance. As noted before, consolidations from 1.0009 might have completed at 0.9774 already. Break of 1.0009 will confirm resumption of whole rise from 0.9406. Also, sustained trading above 0.9912 resistance will confirm double bottom reversal pattern (0.9444, 0.94056) and should target 61.8% retracement of 1.0851 to 0.9406 at 1.0299. On the downside, below 0.9847 minor support will turn bias neutral and will extend the consolidation from 1.0009. But even in case of another fall, we'll stay bullish as long as 0.9741 support holds.

In the bigger picture, the break of 0.9912 resistance and 55 weeks EMA (now at 0.9918) is taken as a signal that a medium term bottom is already formed at 0.9406. This view is affirmed by bullish convergence condition in weekly MACD. Outlook is turned bullish for a test on key resistance level at 1.0851. Nevertheless, note that failure to sustained above 0.9912, followed by break of 0.9741 minor support, will dampen this bullish case and argue that down trend from 1.3063 (2009 high) is still in progress for another low below 0.9406.