Daily Report: Euro Struggling to Extend Rally on Trichet, Kiwi Jumps Risk Appetite and Data

The risk on mode in financial markets continues as Asian equities are broadly higher following strong rally in US stocks overnight. New Zealand dollar leads the way after strong housing data which showed building permits jumped an impressive 13% mom in July. Australian and Canadian dollar closely follow. Swiss Franc continues to be the weakest currency as traders continue to reverse safe-have positions and on concern of more measures from SNB to curb franc strength, including the possibility of deposit charges. Dollar is soft in general but the loss against Euro and Sterling is so far limited and the dollar index is still holding above 73.42 near term support. Euro is still struggling to extend recent rally against dollar and sterling.

Euro bulls are somewhat disappointed by the soft comments from ECB Trichet. As he told in a testimony to the European Parliament, while inflation will likely remain above ECB's 2% target in near term, the bank is reviewing its medium term projections and outlook on inflation. Markets also noted that Trichet has dropped the language about "upside risks to p[rice stability". The new projections will be released in Septembers meeting and downside revisions there will reduce expectation of further hike from the bank. Euribor futures are already starting to price out further hike but starting to price in 30% chance of rate cut next year. We argued that ECB would keep rates unchanged through 2012. Technically, we're prefer to see EUR/USD taking out 1.46, EUR/GBP taking out 0.89 before confirming underlying strength.

FOMC minutes for the August 9 meeting will be the main focus of today. That's the meeting which Fed changed that language to " warrant exceptionally low levels for the federal funds rate at least through mid-2013", replacing "extended period" with a more explicit time frame. Three members dissented and preferred to continue to keep the "extended period language" which was used in the sixteen previous statements. The minutes to be released today should reveal the debate among policy members on such drastic change. Meanwhile, as Bernanke indicated last week, the September meeting will be prolonged by one delay to allow discussion of further easing from Fed. And today's minutes should give some hints on how hard it would be for Bernanke to convince other fellow policy members to vote for further stimulus measures, and what would those measures be.

On the data front, New Zealand building permits jumped 13% mom in July. Japan household spending dropped -2.1%yoy in July, retail trade rose 0.7% while unemployment rate rows to 4.7%. UK mortgage approvals, M4 money supply and Eurozone confidence indicators will be released in European session. Canadian current account, IPPI and RMPI, as well as US S&P Case-shiller house price and conference board consumer confidence will be released later in US session.

NZD/USD jumps further to as high as 0.8536 today so far and remains firm. However, note that the structure of the rebound from 0.7962 is looking corrective. First target of rebound at 61.8% projection of 0.7962 to 0.8410 from 0.8261 at 0.8538 is almost met. NZD/USD would possibly reverse between 0.8538 and 100% projection at 0.8709 to start another fall to extend the correction from 0.8842 high. Hence, we'll start to look for reversal signal on the next rise. Break of 0.8261 will turn outlook bearish for 0.7962 and below. 

EUR/GBP Daily Outlook

Daily Pivots: (S1) 0.8824; (P) 0.8851; (R1) 0.8870; 

EUR/GBP faced resistance from 0.8886 and retreated. With 4 hours MACD crossed below signal line, a temporary top is formed and intraday bias is turned neutral. After EUR/GBP continues to stay in range of 0.8642/8886 and near term outlook remains neutral. We'd prefer to see breakout on either side to confirm the outlook. On the upside, sustained break of 0.8886 will complete a head and shoulder bottom pattern (ls: 0.8704, h: 0.8642, rs: 0.8653) and confirm completion of decline from 0.9083 and should bring retest of this resistance. On the downside, below 0.8794 minor support should rule out the head and shoulder scenario and turn bias to the downside for 0.8642/53 support zone. Break there will resume whole fall from 0.9083.

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. 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.

Economic Indicators Update

GMT	Ccy	Events	Actual	Consensus	Previous	Revised
22:45	NZD	Building Permits M/M Jul	13.00%		-1.40%	-1.00%
23:30	JPY	Household Spending Y/Y Jul	-2.10%	-3.50%	-4.20%
23:30	JPY	Unemployment Rate Jul	4.70%	4.60%	4.60%
23:50	JPY	Retail Trade Y/Y Jul	0.70%	1.50%	1.10%
6:00	CHF	UBS Consumption Indicator Jul			1.48
8:30	GBP	Mortgage Approvals Jul		49K	48.4K
8:30	GBP	M4 Money Supply M/M Jul		0.40%	-0.50%
8:30	GBP	M4 Money Supply Y/Y Jul			-0.70%
9:00	EUR	Eurozone Consumer Confidence Aug		-16.6	-11.2
9:00	EUR	Eurozone Economic Confidence Aug		102	103.2
9:00	EUR	Eurozone Industrial Confidence Aug		-0.5	1.1
9:00	EUR	Eurozone Services Confidence Aug			7.9
12:30	CAD	Current Account (CAD) Q2		-13.6B	-8.9B
12:30	CAD	Industrial Product Price M/M Jul		0.00%	-0.30%
12:30	CAD	Raw Materials Price Index M/M Jul		0.00%	-2.20%
13:00	USD	S&P/Case-Shiller Composite-20 Y/Y Jun		-4.90%	-4.50%
14:00	USD	Consumer Confidence Aug		52.5	59.5
18:00	USD	FOMC Minutes