Daily Report: NZD Lower after Downgrade, Dollar Building Up Momentum

New Zealand dollar is noticeably lower in another quiet Asian session after rating downgrade. Meanwhile, exporters buying send Japanese yen generally higher. Sentiments are still weak in the markets but was somewhat steady as the HSBC China Manufacturing PMI was revised higher to 49.9 in September. Technically speaking, major currencies' recovery against dollar has been losing momentum and there are signs of selloff resumption. USD/CAD takes the lead by breaking 1.0390 resistance. We'll see if dollar regains momentum against as the quarter closes.

Fitch's and S&P's downgraded New Zealand's credit rating amid concerns over the country's fiscal deficits. Fitch trimmed New Zealand's rating to AA from AA+, citing the country's high level of net external debt is an outlier among rated peers - a key vulnerability that is likely to persist as the current account deficit is projected to widen again'. S&P also lowered the country's rating by 1 notch after the 'assessment of the likelihood that New Zealand's external position will deteriorate further'. The downgrades are expected to increase borrowing costs of New Zealand. They will also make it more difficult for the RBNZ to remove the emergency cut implemented after the earthquake.

Sterling is relatively resilient against Euro as an SNB official said the bank will increase Sterling holdings in reserves "in a year's time". Current, the bank is holding 3% of its reserves in the pound which is significantly lower than the 10% between 2004 and 2005. On the other hand, it's holding 55% reserves in Euro, which markets are expecting SNB to reallocate after setting the floor on EUR/CHF. Meanwhile, there are also some support to sterling as Gfk consumer confidence unexpectedly improved to -30 in September.

Yen is broadly higher today as Japanese exports sold both euro and dollar at the end of the fiscal half-year and buy back the yen. But gain is so far limited after Finance Minister Jun Azumi said a further JPY 15T would be authorized or market intervention, bringing the amount up to a record JPY 46T. Azumi also noted that "the recent 75- to 80-yen range could pour cold water on the Japanese economy's recovery,: suggesting the government is deeper concerned with USD/JPY a the current level.

On the data front, New Zealand building building permits rose 12.5% mom in August while NBNZ business confidence dropped to 30.3 in September. UK Gfk consumer sentiments improved to -30 in September. Japan manufacturing PMI dropped to 49.3 in September. Household spending dropped -4.1% yoy in August while jobless rate dropped to 4.3%, industrial production rose 0.8% mom, housing starts rose 14% in August. National CPI core rose 0.2% yoy in August. Look gin ahead, Eurozone CPI flash and Swiss KOF will be the main focus in European session while Canada GDP and US personal income and spending will be the main focus in US session. 

USD/CAD Daily Outlook

Daily Pivots: (S1) 1.0276; (P) 1.0338; (R1) 1.0421; 

USD/CAD rises to as high as 1.0407 so far today and the break of 1.0385 indicates that recent rebound from 0.9406 has resumed. Intraday bias is back on the upside and further rally should be seen towards 161.8% projection of 0.9406 to 1.0009 from 0.9725 at 1.0701 next. On the downside, below 1.0256 minor support will turn bias neutral. Further break of 1.0142 support will suggest short term topping, possibly with bearish divergence condition in 4 hours MACD, and bring deeper pull back.

In the bigger picture, sustained trading above 55 weeks EMA affirms the case that whole down trend from 2009 high of 1.3063 has finished at 0.9406 on bullish convergence condition in weekly. Current rally from 0.9406 should now target 1.0851 resistance (38.2% retracement of 1.3063 to 0.9406 at 1.0803). Break there will extend the rebound to 61.8% retracement 1.1666. On the downside, break of 0.9725 support is needed to confirm completion of the rise from 0.9406. Or, we'll stay bullish in the pair.

EUR/USD Daily Outlook

Daily Pivots: (S1) 1.3516; (P) 1.3598 (R1) 1.3676; 

With 1.3477 minor support intact, EUR/USD's recovery form 1.3362 might extend further. But after all, the current rise is treated as a correction in the larger decline only. Hence, we'd expect upside to be limited by 1.3936 resistance and bring fall resumption. Below 1.3477 minor support will flip bias back to the downside. Further break of 1.3362 will target 161.8% projection of 1.4939 to 1.3969 from 1.4548 at 1.2979, which is close to 1.3 psychological level.

In the bigger picture, current development indicates that medium term rise from 1.1875 has completed with three waves up to 1.4939 already. That also suggests that it's merely part of the consolidation pattern that started back in 2008 at 1.6039. Further decline would now be seen to 1.2873 support first and break will target 1.1875 and below. On the upside, above 1.4548, resistance is needed to confirm completion of the fall from 1.4939 or we'll stay bearish in EUR/USD.

EUR/JPY Daily Outlook

Daily Pivots: (S1) 103.53; (P) 104.23; (R1) 105.15; 

With 103.00 minor support intact, EUR/JPY's recovery from 101.93 might extend further. But after all, it's treated as a correction in the larger decline only. Hence, we'd expect upside to be limited by 106.98 resistance and bring fall resumption. Below 103.00 minor support will flip bias back to the downside for 101.93 and then 100 psychological level.

In the bigger picture, whole down trend from 2008 high of 169.96 is still in progress and is building up downside momentum again. Sustained trading below 100 psychological level should pave the way to 100% projection of 139.21 to 105.42 from 123.31 at 89.52, which is close to 88.96 all time low. On the upside, break of 123.31 resistance is needed to confirm trend reversal or we'll stay bearish.

GBP/USD Daily Outlook

Daily Pivots: (S1) 1.5540; (P) 1.5627; (R1) 1.5713; 

With 1.5542 minor support intact, recovery from 1.5327 might still extend higher. But after all, such recovery is treated as a correction only and hence, we'd expect upside to be limited by 38.2% retracement of 1.6618 to 1.5327 at 1.5820 and bring fall resumption. Below 1.5542 minor support will flip bias back to the downside. Further break of 1.5327 will resume recent decline and target 161.8% projection of 1.6746 to 1.5780 from 1.6618 at 1.5055 next.

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 1.4229 resistance should be seen. Break of 1.4229 will bolster the down trend resumption case and would possibly push GBP/USD through 1.3503 low. On the upside, break of 1.6618 resistance is needed to invalidate this view. Or we'll now stay cautiously bearish in GBP/USD.

Economic Indicators Update

GMT	Ccy	Events	Actual	Consensus	Previous	Revised
21:45	NZD	Building Permits M/M Aug	12.50%		13.00%	14.30%
23:01	GBP	GfK Consumer Sentiments Sep	-30	-33	-31
23:15	JPY	Nomura/JMMA Manufacturing PMI Sep	49.3		51.9
23:30	JPY	Household Spending Y/Y Aug	-4.10%	-2.80%	-2.10%
23:30	JPY	Jobless Rate Aug	4.30%	4.70%	4.70%
23:30	JPY	Tokyo CPI Core Y/Y Sep	-0.10%	-0.10%	-0.20%
23:30	JPY	National CPI Core Y/Y Aug	0.20%	0.10%	0.10%
23:50	JPY	Industrial Production M/M Aug P	0.80%	1.50%	0.40%
1:00	NZD	NBNZ Business Confidence Sep	30.3		34.4
5:00	JPY	Housing Starts Y/Y Aug	14.00%	4.50%	21.20%
9:00	EUR	Eurozone CPI Estimate Y/Y Sep P		2.50%	2.50%
9:00	EUR	Eurozone Unemployment Rate Aug		10.00%	10.00%
9:30	CHF	KOF Swiss Leading Indicator Sep		1.33	1.61
12:30	CAD	GDP M/M Jul		0.30%	0.20%
12:30	USD	Personal Income Aug		0.10%	0.30%
12:30	USD	Personal Spending Aug		0.20%	0.80%
12:30	USD	PCE Deflator Y/Y Aug		3.00%	2.80%
12:30	USD	PCE Core M/M Aug		0.20%	0.20%
12:30	USD	PCE Core Y/Y Aug		1.70%	1.60%
13:45	USD	Chicago PMI Sep		56.5	56.5
13:55	USD	U. of Michigan Confidence Sep F		57.8	57.8

China PMI Data in Focus - Hard Landing Ahead, or ?

Eurozone manufacturing PMI has been trending lower since February, U.S. manufacturing ISM from the same date while China’s retreat was delayed for one month, testimony to the global economic slowdown we have been experiencing.

Source: Bloomberg

China will be the first to release data for September with the flash HSBC manufacturing PMI, which is based on 85-90 percent of survey responses, already released on 22 September and showing a reading of 49.4, slightly softer than the 49.9 posted in August and notably still below the 50/50 contraction/expansion threshold. The details behind August’s second month below the 50 mark showed orders contracting at the same rate as July but, perhaps more worrying, new orders showed a faster pace of decline. If we get a final reading below 50 again, this would be the third month in a row and most likely heighten the debate as to whether China is heading towards a hard landing or not.

The official PMI survey, which surveys almost twice the number of companies as the HSBC/Markit survey, has remained resiliently above the 50 mark since February 2009 and analysts note that this is likely because larger state-owned enterprises are included, which might not have been affected to as great a degree by the authorities’ recent tightening campaign. The latest median forecasts suggest a mild pick-up to 51.1 though the range of estimates varies from 50.3 to 52.2. We would prefer to cast our forecast below median estimates at 50.9.

The HSBC PMI manufacturing data is released on 30 September at 0230GMT. The official PMI is released on 1 October at 0100GMT.

Flag formation on EURJPY gives great risk/reward potential

The pullback yesterday was in three waves (a classic pattern for a correction) with the cross stopping between 50 and 61.8 percent. This whole move lower can been seen as a corrective flag with the bias now strongly to the upside. The risk / reward facture here is very good with the upside target at 106.20. The stop can be placed inside the flag (-103.90).

For further confirmation we can use the cloud as support.

GBPUSD - Cautiously Bullish above 1.5575

Trading was subdued in Cable Wednesday. This confirmed our indecisive call with all trading confined tightly within Tuesday’s price range. This ‘Inside Day’ highlights continuing uncertainty and in fact the weakness of the net decline has been emphasised by a return of investor demand in Asia.

The upside has not been strong enough to break out of Tuesday’s parameters but intraday signals for sentiment are now mildly bullish. Current volatility adds an extra note of caution and so our call is Cautiously Bullish and on setbacks above 1.5575. The immediate objective is 1.5656 with a move beyond that point targeting 1.5706, Tuesday’s peak, or even 1.5748, the high from Sep 21st.

Selling through 1.5575, today’s Asian open, is the risk to this call as it signals that buying pressure is weaker than currently assessed. The market should then decline to 1.5543, the overnight low, then 1.5482, this week's open.

Gold Margin Increase Triggers Rout

The past week in metals has been one for the record books. Silver dropped by 34 percent in a matter of days, its sharpest drop in 30 years. Gold meanwhile corrected by 20 percent from its peak, which has only happened twice before during the last decade. Copper corrected by one third from the February high as hedge funds reversed their positions into shorts for the first time in more than two years.

The reasons behind the sell-off are numerous: risk adversity, a scramble to realise cash to cover loss-making positions elsewhere, economic slowdown reducing demand for industrial metals and not least another margin hike by CME, the world’s largest futures exchange. Added to this there has been market talk about heavy selling by Chinese investors. They have been focusing on the strength of their domestic economies and have been caught out by the slowdown elsewhere.

Since early August gold volatility has been stubbornly high indicating increased uncertainty about the future direction. Up until and following September 6, when a new record high at 1,921 was reached, professional investors had begun to reduce exposure despite global stock markets going into reverse. Several 100 dollar corrections during the last month added to the unease among investors who had been viewing gold as the ultimate safe haven asset. 

The rout happened last Friday as rumours about an imminent CME margin hike on the gold futures contract pushed it below 1,700, only to accelerate Monday when Far Eastern investors could react to the new situation. Silver extended the sell-off that began in early May and gold reached but did not breach the line in the sand being represented by its 200-day moving average. 

In our article “Heads up! Gold futures margin could be raised again” from August we argued that the ongoing volatility and daily price swings probably warranted another hike to between 8,200 and 9,000 dollars per contract. On Friday the margin for holding a gold futures contract was raised to 8,500 which means an investor at the current gold price needs to pay 5.2 percent of the contract value to maintain a position. 

Such a margin is historically relatively high and unless we see a further escalation this should probably be enough for now. Technically gold held and bounced strongly of its 200-day moving average, currently at 1,530, and this has returned some of the confidence that was lost during the rout. The arguments for holding gold have if anything strengthened during August so once this nervousness subsides gold could shine once again. 

What are the risks from here? It took 18 months to reclaim a new high during the previous two major corrections in 2006 and 2008; investor redemptions from exchange traded funds (ETF) have so far been very limited and as such carry the risk of further selling should that type of investor decide to scale back as well. Lastly and probably most importantly we need to see volatility reduced as excessive volatility poses the biggest risk to gold’s safe haven appeal.

EURUSD in Temporary Limbo

Too early to tell whether that was it for the bear squeeze, but EURUSD failed to hold a minor new high today in the wake of the Barroso speech. 1.3550 is a tactical focus if the bears want to tactically regain the upper hand.

Odds and ends
Some ugly confidence numbers out of Sweden. While the manufacturing confidence was steady (though still at a negative level), consumer confidence plummeted and the economic tendency survey was also very weak, with both of the latter two at their worst levels since 2009. The Swedish krona is back in the range against the Euro after the recent risk meltdown saw It make and attempt at new 10-month high before the sell-off eased.

US durable goods orders data out of the US were subdued. There have been very few swings in the ex Transportation data series for several months now, an usual state of affairs for this normally volatile data series. On the bright side, the core “Capital goods non-defense ex Aircraft” measure saw a strong rebound, even from heavily upward revised July data. The question going forward is the degree to which durable goods orders will slow after the end of the year due to the hefty writedown incentives provided by the Obama administration that expire at the end of this year.

Dovish utterances from the BoE’s Miles today in an interview with The Times newspaper as he indicated he was leaning more toward voting in favor of more asset purchases today, though his mind was still “finely balanced”. This and Barroso’s speech to help drive EURGBP higher, but the pair then moved back just below the 200-day moving average (around 0.8710) again by the time of this writing. 0.8650 looks like an important level if the pair heads lower.

Chart: EURGBP
Interesting to see EURGBP so rangebound when we have such important outstanding questions about the Euro. But both currencies are quite weak as the BoE is clearly leaning toward more quantitative easing. The pair are in the vice grip of a range at the moment, with 0.8650 the first interesting are of support to the downside, followed by the recent 0.8530 area low.

Looking ahead
The Euro rally on the “strength” of EU commission president Barroso has so proved choppy, as we suggested this morning it might not last long, though it is too early to tell as of this writing, as 1.3595 minor support and bigger support down at 1.3550 are still in place after we surprisingly rallied all the way to new local highs earlier in the day.  The risk appetite side of the equation is an important one from hour to hour as well. Regarding Barroso’s speech: again, the assumption is that it will be very difficult to get Germany on board Barroso’s “stability bond” train and that yet another chapter of the extend-and-pretend saga is a more likely route to be taken. On that note, the SPV solution appears more likely, the question being whether the EU’s shenanigans have become so desperate that the market refuses to play ball without a better quality solution. 

As for the financial transaction tax – Britain will never go for it and large European banks would look to start pulling up as many stakes as they can in order to take their operations abroad before the eventual implementation date, assuming legislation is ever passed. There’s something not right about Barroso upbraiding the banks for bad behavior when a significant reason EU banks are in trouble is due to their massive sovereign debt holdings – which under strain because of poor political leadership.

Watch out for the SNB’s Jordan set to speak in basel at 1615 GMT today – this could get CHF crosses to sit up and pay attention. Less importantly, watch out for Bernanke out enlightening a Cleveland, Ohio audience on “Lessons from emerging market economies on the sources of sustained growth”. Hmmm.

Economic Data Highlights

• Australia Aug. New Home Sales rose +1.1% MoM vs. -8.0% in Jul.
• Germany Aug. Import Price Index fell -0.7% MoM and rose +6.6% YoY vs. -0.3%/+6.7% expected, respectively and vs. +7.5% YoY in Jul.
• Sweden Sep. Consumer Confidence out at -5.8 vs. +1.2 expected and +4.3 in Aug.
• Sweden Sep. Manufacturing Confidence out at -3 vs. -6 expected and -3 in Aug.
• Sweden Sep. Economic Tendency Survey out at 96.9 vs. 97.3 expected and 100.3 in Aug.
• Germany Sep. CPI out at +0.1% MoM and +2.6% YoY vs. -0.1%/+2.4% expected, respectively and vs. +2.4% YoY in Aug.
• US Aug. Durable Goods Orders out at -0.1% MoM and ex Transportation out at -0.1% MoM, vs. -0.2%/-0.2% expected respectively.
• US Aug. Capital Goods Orders – non defense and ex Airplanes out at +1.1% MoM vs. +0.4% expected
• Canada Jul. Teranet/National Bank Home Price Index rose +1.3% MoM and +5.3% YoY vs. +1.7%/+4.5% in Jun., respectively

Upcoming Economic Calendar Highlights (all times GMT)

• US Weekly DoE Crude Oil and Product Inventories (1430)
• Switzerland SNB’s Jordan to Speak (1615)
• US Fed’s Bernanke to Speak (2100)
• Japan Aug. Retail Trade (2350)

A Break of the 50% fib Could see EURUSD Reach 1.3500

The EUR/USD has continued its rise today and could still have much further to go. Choosing where to move the stop to is always difficult and never an exact science. As this trade is based on Fib levels, the 1.3610 area may be a good place as it is 50 percent of today's highs and lows. If we get a break of that level we might see a return towards the 1.3500 area where we could still look for further long entries.

12 Giant U.S. Banks Vulnerable to Disaster!

Martin D. Weiss Ph.D.

Imagine this scenario …

The largest economy in the world is on the brink of a financial meltdown that could make the debt debacle of 2008 seem small by comparison.

Its giant banks are buried in bad loans and vulnerable to failure.

Its central government is paralyzed.

Chaos looms.

A Desperate Meeting

One weekend, in a last-ditch attempt to avoid disaster, top finance officials — representing 117 countries and six billion souls — come together and meet.

The officials engage in intense — sometimes frantic — debate. They explore every possible solution known to modern man, plus some that are still not known.

But they’re stumped. They come up with no new ideas.

That’s when the highest finance official of the world’s second-largest economy speaks.

He can barely mask his frustration — and fear — as he calls for massive, unprecedented steps to stem a domino-like series of defaults.

He cites words such as “cascading default, bank runs, and catastrophic risk.” And he bluntly tells the group that time is running out!

But when the meeting adjourns, nothing has been done; no decisions have been made. Instead, the finance officials fly home to the far corners of the globe. They go home to their families. And secretly, they pray the financial collapse does not destroy modern society as we know it.

Unbelievable? Then Consider This …

This was not a fictional scenario. It actually happened EXACTLY as I just described — THIS past weekend!

The economy on the brink of financial meltdown is the European Union. With a GDP nearly $2 trillion larger than the GDP of the United States, it is clearly the biggest economy in the world.

The giant European banks buried in bad loans include France’s Crédit Agricole and Société Générale. With $3.6 trillion in assets between them, they are the largest in the world.

And the high finance official who issued the doomsday warning is none other than U.S. Treasury Secretary Timothy Geithner.

Speaking before the delegates to the IMF/World Bank meeting in Washington, D.C., this past Saturday, his warnings were shocking. So they merit repeating:

→ Cascading default

→ Bank runs

→ Catastrophic risk

→ Running out of time!

Why was he so blunt? What does he fear that average citizens are just beginning to comprehend?

Is it the recent panic in the global markets — investors dumping sovereign bonds, banks recoiling from interbank lending, global money markets freezing up?

Is it the utter fragility of the U.S. economy, still struggling to recover from its own debt nightmare?

Or is it the chronic vulnerability of America’s largest banks, still loaded with bad mortgages, still taking massive risks with derivatives, and still directly vulnerable to Europe’s debt disaster?

The answer: All of the above! But of greatest concern is …

The Fragility of America’s Largest Banks

Many investors seemed shocked when Moody’s downgraded Bank of America’s long-term debt from A2 to Baa1 last week.

But even with the downgrade, we believe Moody’s is being overly generous to Bank of America. The bank has …

• $421.7 billion tied up in mortgages — more than any other bank on the planet!

• $52.5 trillion in high-risk derivatives — more than 36 times larger than its total assets and nearly 341 times bigger than its risk-based capital!

• Massive exposure to the possibility that some of its trading partners in the U.S., Europe, or elsewhere might default — to the tune of 182% of its capital, according to the Comptroller of the Currency.

And it’s not alone! Other major U.S. banks are in a similar predicament.

Candidates for Disaster

It’s because of these kinds of dangers that, one month ago, I warned Bank of America was a candidate for bankruptcy.

And it’s also because of these dangers that I’m publishing here our latest list of the nation’s weakest large banks, based the latest second-quarter data recently released by the FDIC.

Bank of America merits a Weiss Rating of D (weak). But it’s clearly not the only one. Also getting a D grade are two other giants — JPMorgan Chase and Wells Fargo.

Nor is this weakness restricted to the nation’s largest banks. Major regional institutions — SunTrust Bank, Regions Bank, Compass Bank, Huntington National Bank, and others — are also vulnerable.

All told, 2,553 U.S. banks and thrifts now get a Weiss Rating of D+ (weak) or lower, implying widespread vulnerability to the consequences of sovereign debt defaults in Europe and to a double-dip recession in the U.S.

How Could This Impact You?

In too many ways!

First, if you own bank stocks, you’re bound to lose a lot of money. Their shares are already plunging, and the experience of 2008-2009 tells us they could fall a lot more.

Second, banks and other financial institutions are the heartbeat of the entire economy. If they go down, so does business.

Third, if you have money in a weak bank, it could be in jeopardy. Yes, the U.S. government may come to the rescue. But because of scarce government resources and new, stricter bailout laws, this time around, any bailouts are bound to be more painful — to the bank, its shareholders, AND its creditors.

My recommendation:

1. Get your money to safety. If you must use a bank, do most of your business with those meriting a Weiss Rating of B+ or higher.

2. Never allow your deposits to exceed the FDIC protection limit.

3. For added safety and liquidity, seriously consider moving a big chunk of your cash from bank deposits and checking accounts to

• 3-month Treasury bills (which you can buy through your broker or directly from the Treasury) or …

• A money market fund that invests exclusively in short-term Treasuries.

Yes, I recognize that Uncle Sam’s finances are also shaky — a factor that could impact the price of medium- and long-term Treasuries. But short-term Treasuries are still safe. For cash you must keep away from market declines, they remain the best option.

4.With the right investments, the more bank stocks plunge, the more money you can make. And if a bank fails, the profit potential is enormous. But that’s just one way to use this great crisis as a great wealth builder. For details, see our latest video before it’s too late.

Good luck and God bless!

Martin D. Weiss Ph.D.

Dr. Weiss founded Weiss Research in 1971 and has dedicated the past 40 years to helping millions of average investors find truly safe havens and investments. He is president of Weiss Ratings, the nation’s leading independent rating agency accepting no fees from rated companies. And he is the chairman of the Sound Dollar Committee, originally founded by his father in 1959 to help President Dwight D. Eisenhower balance the federal budget.

Modest Excitement Over Barroso Speech to Quickly Fade?

A modest rally in Euro crosses this morning in the wake of a speech by EU Commission president Barroso, who proposed Euro Bonds and a Financial Transaction tax. Anything in this for the Euro?

In a State of the Union speech this morning before the EU parliament, Mr. Barroso proposed the introduction of EuroBonds or Euro “stability bonds” (with specifics to arrive in “coming weeks”) and a Financial Transaction Tax (FTT rumored to be 0.01% per transaction on equities, bonds and derivatives. Status on currency transactions unknown). On the subject of the FTT, the recent round of debate on this matter from some 10 days ago saw Italy, Britain and Sweden against the measure, while France, Spain, Denmark, Belgium and Germany  are considered in favor. The tax, if it is passed one day, may not be implemented until 2014, so one wonders at the immediate impact, even if the whole idea is a rather significant one. On the subject of Euro Bonds or stability bonds, can Germany ever pass such a thing? Seems doubtful and the more likely route may be the “Enronized” EFSF proposals that have come to the fore of late.

While the Euro rallied a bit during Mr. Barroso’s speech, we make a brief reality check by looking at the forwards, interest rate spread changes and basis swaps, all which suggest nothing has materially changed from this speech, and thus suggesting that the range will hold here all other things being equal. So from here, the EURUSD will likely go back to following the influence on risk appetite/positioning/end of month/quarter developments. On that note, Zero Hedge reminded us in its dramatic way this morning that many funds out there are hurting (and Goldman Sachs announced the closing of its Global Alpha fund – a key industry indicator if there ever was one).

Chart: EURUSD
EURUSD rallied closed back to yesterday’s highs, but various indicators point to little reason for today’s rally and suggest that the pair is getting expensive at current levels given the backdrop. Of course, any extension of yesterday’s equity rally could put the greenback under pressure. To the downside, the 1.3550 area has taken on considerable significance over the last few days and might act as a support/pivot zone.

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.

Daily Report: Risk Aversion Recedes on EU Hopes, Dollar Retreats

Dollar retreats mildly today as risk aversion recedes on hope that European central bankers and officials are putting up a plan to resolve the region's debt problems. Asian equities recover broadly following the 272 pts rebound in DOW overnight. While there is no details yet, it's thought that Eurozone leaders are seriously considering to expand the EFSF fund by borrowing from ECB and leverage while ECB could also announce to restart covered-bond buying next week. Such anticipation will provided support to deeply oversold financial markets in near term but sentiments will remain vulnerable to more negative news out of Europe.

Also, note that the recovery in risk is more technical than fundamental, in particular in precious metals. Gold just few strong support from a key support level of 1577 while silver also rebounded strongly from 26.3 key support. It's totally normal and reasonable for traders to take profits on short positions after the steep dive, and after gold and silver hit the mentioned support levels. Current rebound doesn't warrant a change in overall bearish trend. As mentioned in our weekly report, major stock indices are still holding above August low. We don't take that as sign of resilience, but rather as a sign that the down trend isn't finished but stocks are just still carrying on the consolidations. More risk selloff is still anticipated at a latter stage.

Spain's bond auction will be a focus today which the country is planning to EUR 2.5b and EUR 3.5b of three- and six-months bills today. Meanwhile, Italy will sell as much as EUR 14.5b of government debts later in the week. On the data front, Japan corporate service price index dropped -0.4% yoy in August. Swiss UBS consumption indicator dropped to 0.79 in August. German GFK consumer sentiment was unchanged at 5.2 in October. Eurozone M3, UK CBI reported sales US S&P case shiller house price and consumer confidence will be released later today.

Dollar index faced some resistance from 38.2% retracement of 88.70 to 72.69 at 78.80 and retreats. Some consolidations would be seen below 78.86 temporary top is near term. But we'd expect downside to be contained above 76.06 support and bring another rise. There is no change in the view that whole decline from 88.70 has finished at 72.69 already. And current rise from 72.69 is expected to continue further through 80 psychological level to 61.8% retracement at 82.58 and above in medium term. 

AUD/USD Daily Outlook

Daily Pivots: (S1) 0.9690; (P) 0.9763; (R1) 0.9905; 

AUD/USD's recovery and break of 0.9866 minor resistance suggests that a temporary bottom is in place at 0.9621, just ahead of 100% projection of 1.1079 to 0.9926 from 1.0764 at 0.9611. Intraday bias is turned neutral and some consolidations would be seen. But upside should be limited below 1.0177 support turned resistance and bring another fall. Below 0.9621 will target 0.9404 key support level next. Nevertheless, break of 1.0177 will be the first signal that whole correction fro 1.1079 has completed and will turn focus to 1.0764 resistance for confirmation.

In the bigger picture, the break of long term channel from 2008 low of 0.6008 was relatively brief so far. And AUD/USD manages to recover ahead of mentioned 0.9611 projection level. Thus, the steep fall from 1.1079 could possibly be a correction only, or part of a medium term consolidation. In any case, we'll still prefer to see firm break of 0.9404 key support level to confirm trend reversal, or we'll stay long term bullish in AUD/USD.

Economic Indicators Update

GMT	Ccy	Events	Actual	Consensus	Previous	Revised
23:50	JPY	Corporate Service Price Y/Y Aug	-0.40%	-0.40%	-0.50%	-0.30%
6:00	CHF	UBS Consumption Indicator Aug	0.79		1.29
6:00	EUR	German GfK Consumer Sentiment Oct	5.2	5.1	5.2
8:00	EUR	Eurozone M3 Y/Y Aug		1.90%	2.00%
10:00	GBP	CBI Reported Sales Sep		-14	-14
13:00	USD	S&P/Case-Shiller Composite-20 Y/Y Jul		-4.40%	-4.50%
14:00	USD	Consumer Confidence Sep		46.5	44.5

 

EURUSD - Bullish above 1.3479

Against a background of bearish signals for EURUSD sentiment this week, early Asian selling Tuesday yielded a new 8 month low. Those levels, beneath 1.3400, were rejected sharply to take EURUSD back to almost unchanged levels on the day which highlights a degree of investor uncertainty. However, it is the sharp recovery that is assessed as the key feature and in view of this our call is Bullish above 1.3479.

The immediate objective is 1.3568, the overnight high, with a move beyond that point targeting 1.3602, last Thursday’s top, or even towards Wednesday’s 1.3701 open.

Selling below the overnight base of 1.3479 is the risk to this call as it indicates that the rally from yesterday's low is weaker than currently assessed. Prices and sentiment should then decline to 1.3416, yesterday's European afternoon low, or even the day’s 1.3362 base.

The Central Bank Is a Violent, Thieving, Political Monster, Not a Business

Central Banks Aren't Banks
I am going to make a number of obvious statements that we all can agree are true, but what they add up to is a startling conclusion. What we call "central banks" are not banks at all.

What is a bank? According to a helpful little essay on banks for students at ThinkQuest helpfully titled "What is a Bank?", a bank is a financial organization in which people deposit their money. A bank is a business. According to the aforementioned essay, "each bank tries to make THEIR bank look better than all of the other banks by offering services that some other banks might not have." That is to say, banks compete in a market. This is true, conceptually at least, and also true to some extent in reality, although numerous banking laws seriously alter the market and the competition. But it is the pure idea we are after here, and in the pure idea, a bank is a business that competes in a market.

I won't analyze every "central bank" in the world. I don't have to because their setup is more or less the same everywhere. I'll use the Federal Reserve System (the Fed) to represent all of them.

Historically, the Fed and other "central banks" came to be called "central banks" for several reasons. First, they are financial organizations. Second, they hold deposits of other banks and governments. Third, their assets are largely financial assets. Fourth, they make advances or loans to other banks on collateral. Fifth, the government has made them to be at the heart or center of the banking industry and the monetary system. Sixth, government power is itself centralized or national. All of these statements are factual.

Now, this is an imposing array of reasons why "central banks" are called "central banks." But the most important of these reasons is the fifth reason, which is that the government has used its power to make the "central bank" central. And because the government has used its power to create the "central bank" and make it central, we know that the "central bank" is not a free market institution.

This is the main ground upon which I challenge the notion that a "central bank" is a bank. The concept of "central bank" fails to distinguish a free market business and a bureau created by government power. The term "central bank" undermines this distinction between free market and government. Indeed, it erases it altogether.

The Fed is not a business. It has powers that no ordinary bank has. It has privileges that no ordinary banks have. It doesn't compete with other banks. The government created the Fed. The government gave it power to create fiat money. The government can alter the Fed's organization and powers at any time. The Fed's so-called independence from the government is mythological. It is that of a dog on a long leash. The only independence the Fed has is from the public.

Let's go back for a moment to the essay on banks that I just cited, because it displays this erasing of any distinction between the free market and government. After defining the term "bank," it lists the kinds of banks. Quite suddenly, it introduces the term "central bank" in the same breath as ordinary banks that have national or state charters. It says, "There are different kinds of banks. There are national banks, state banks and central banks. The Federal Reserve Bank is the United States government's central bank. The Bank of England is England's central bank."

Suddenly, what this essay told us earlier disappears. We were told that a bank was a business that competed with other banks. But now we are told that the Fed "decides how much money is in circulation" and that it "may tell the [ordinary] banks to charge more interest or keep more money in 'reserve.'"

Obviously, if the "central bank" has such powers, it gets them from the government. Just as obviously, the "central bank" is not a business and not in competition with other banks if it exercises these and other powers over ordinary banks.

Furthermore, distinctions between monies that ordinary free market banks deal in and the fiat money that central banks produce are completely glossed over and erased.

This essay is representative of the usual thought in the field of economics. Banks are businesses. But then, all of a sudden, there is another so-called "bank" that has an array of powers that business banks do not have. This "bank" is actually a government bureau. Its fiat money is made into legal tender by the government. The government states that it stands behind this money. This "bank" has powers to control and organize the ordinary banks into a cartel.
 

The facts I've pointed out are widely recognized. There is a Wikipedia article titled "Central Bank" that confirms this:

"A central bank, reserve bank or monetary authority is a public institution that usually issues the currency, regulates the money supply and controls the interest rates in a country. Central banks often also oversee the commercial banking system of their respective countries. In contrast to a commercial bank, a central bank possesses a monopoly on printing the national currency, which usually serves as the nation's legal tender."

This too makes it very clear that a "central bank" is not a bank, but a powerful Monetary Authority and Fiat Money Administration.

However, the same Wikipedia article almost immediately contradicts itself when it states: "Central banks in most developed nations are independent in that they operate under rules designed to render them free from political interference."

How can a bureau that is established by the government and possesses extraordinary powers be independent and free from political interference? The "central bank" embodies political interference!

And to the extent that a Monetary Authority such as the Fed has been granted powers that it can exercise free of political interference, how can such an institution be held accountable? How can it operate without being responsible to the government and, indirectly, to the people?

"Central bank" independence is to a large extent a myth, that is, in the essence of the institution and in those activities in which it is not mythical, it is an unaccountable power.

It may seem as if I am splitting hairs, but what I see is that the common explanations of central banking confuse banking as might occur in free markets with so-called banking as executed by a "central bank" that is empowered by government. They are two entirely different kinds of operations. A thoughtful or questioning reader is bound to feel a degree of discomfort when he encounters these explanations that blur important distinctions.

A "central bank" is a government department. It is a government bureau. It is the government's fiat money bureau. The "central bank" is the government's money-printing machinery or money-printing organization or money-printing bureau or money-printing agency. As contrasted with monies produced in a free market, the Fed's money is state-produced "money." In the sense of comparing the Fed's money to free-market money, it is counterfeit. It is held up by the force of government law and power. It is imposed on the public.

A more accurate term for the Fed might be the "Fiat Money Administration." Perhaps the term "Monetary Authority" would be more accurate. It would be more accurate if the latter were the official name. In the U.S. Constitution, at least, it is clear that there is no power to create a Monetary Authority, and if there were such a power, it could not possibly be delegated in such a way as to make that Monetary Authority independent.

The "central bank" is not a real bank. Everything about it is permeated with government power. At the heart of the financial and monetary system of a nation that is supposed to be an exemplar of free markets is a government money-bureau.

Regards,

Michael S. Rozeff

Michael S. Rozeff is a retired professor of finance living in East Amherst, New York. He is the author of the free e-book Essays on American Empire: Liberty vs. Domination and the free e-book The U.S. Constitution and Money: Corruption and Decline. 

Gold: Too Fast too Soon but Fundamentals Still Very Positive

Jeff Nichols warned that the summer run-up in the gold price was too far too fast and predicted a big fall but still feels that fundamentals support much higher prices ahead.

www.mineweb.com 

NEW YORK

"At some point, however, we will see a correction, perhaps a sizable one. After all, even strong bull markets never move up in straight lines. I would not be surprised to see gold stumble - falling back $100, $200, or even $300 - before prices begin working their way higher once again."

That was my view published here on Mineweb in late August.

Gold has certainly taken a dive - and could stumble further in the days immediately ahead - but I think we will see the yellow metal begin its comeback sooner rather than later, possible in the next few days.

This summer we raised our year-end price forecast to $1,850 an ounce - but remained reluctant to adjust our expectations upward as the price moved past this level and briefly traded over $1,900 an ounce in early September.

Although physical demand in world bullion markets remained firm, it seemed to me that the price was moving up too fast too soon as institutional speculators extended their "long" positions in "paper" derivative markets.

SHOOT THE SPECULATORS

Now - rather than any dramatic reversal in world physical markets - it looks like the precipitous price decline in recent days can be blamed entirely on these same speculators (including some prominent hedge funds and the trading desks of the big Wall Street banks) reversing their positions or cashing out of gold altogether.

Nothing that has occurred in the past few days in any way diminishes my long-term enthusiasm about gold-price prospects. The same bullish gold-market fundamentals and macroeconomic trends that I have been discussing for many years now remain in place and promise significantly higher gold prices over the next five years or longer.

It is important to remember that violent sell-offs in equity and other asset markets typically spill over into the gold market . . . but after an initial selling wave, gold tends to disassociate itself from and act independently to other asset markets.

At first, when other assets are under extreme pressure, as has been the case this past week, gold's immediate reaction reflects reflexive selling by institutional speculators - including momentum, program, and other "black box" traders. Short-term trading in derivative markets may, at times, produce a great deal of gold-price volatility but, in my book, it does not affect the long-term price trend. In a sense, gold is an "innocent bystander."

NOTHING WE HAVEN'T SEEN BEFORE

While the magnitude of gold's decline seems stunning in absolute terms, keep in mind it is not unusual for gold prices to correct by 10%, 15%, 20% or even more after a run-up the likes of which we've seen this year. Old timers may recall the 1970s, when we saw at least a couple of bigger percentage corrections in the midst of a long-lasting bull market.

Now, from its September 6th all-time high around $1,923 an ounce to this Friday's (September 23rd) low around $1,628 an ounce in New York trading, we are off just about 15 percent - certainly not so much when you consider the previous advance . . . certainly not so much to those who remember gold's volatile price history . . . and certainly not so much as to cause much alarm among those who pay close attention to gold's fundamentals.

FUNDAMENTALS COUNT

And speaking of fundamentals - with the exception perhaps of India - physical demand in recent days has held up fairly well. Meanwhile, it is not unusual for more price-sensitive trading-oriented Indian gold dealers to pause, at times like this, for the dust to settle before stepping back as buyers. For sure, there is nothing here to diminish India's long-term appetite for gold.

Meanwhile, my China contacts report no immediate diminution in retail gold demand from the world's biggest national gold market. Driving Asian demand - in India, China, and elsewhere has been the continuing rise in household incomes in tandem with worrisome inflation - and this pro-gold combination is unlikely to change in the foreseeable future.

WATCH THE CENTRAL BANKS

For the past few years (in speeches, published articles, client reports, and on my website NicholsOnGold.com), I've been talking a lot about the revival and growth of central bank gold interest - and its long-term significance to the market and the future price.

I believe that a few central banks - central banks that have been fairly regular buyers, acquiring gold month in and month out - have already stepped up their purchases in reaction to the lower, more attractive, price levels now prevailing. And other countries are likely to add to their own gold reserves in the days ahead as it becomes more apparent this correction has run its course.

The central banks of Russia and China (which does not report or publicize its on-going gold purchases) are the first that come to mind, but quite possibly other central banks will also use this episode of gold-price weakness to acquire metal without causing any overt market reaction.

In my book, gold's own supply/demand situation and other recent-year institutional or structural changes in the gold market per se (such as the introduction and growth of gold exchange-traded funds or the legalization of private gold investment in China) suggest more gold price strength ahead.

AND SHOOT THE POLITICIANS TOO

So, too, does the inability and disarray among of our economic policymakers and politicians, those entrusted with our financial and monetary wellbeing, to frame appropriate policies that would deal effectively with today's economic realities.

Indeed, U.S. and European economic prospects continue to deteriorate, suggesting we will see still more desperate monetary stimulus from the Fed and the European Central Bank (the ECB) before the end of this year.

Here in the United States, the Fed will be facing continued signs of renewed recession or recession-like business and employment conditions.

Across the Atlantic, the ECB will be struggling to prevent the approaching Greek sovereign debt default and the insolvency of some European banks holding Greek sovereign debt. Some fear this would be a catastrophe far worse than the Lehman Brothers bankruptcy - with dire consequences for the world economy.

While these problems are unlikely to trigger any immediate policy response from the Fed or the ECB in the next week or two, as pessimism grows among investors and traders, expectations of further monetary accommodation could stimulate more investment demand in the days and weeks ahead.

So, too, could U.S. Congressional bickering and inaction on both the U.S. Treasury debt ceiling and on the Federal budget impasse as these issues again become headline news.

LONG-TERM BUYERS RULE

To recap: Short-term trading in derivative markets may, at times, produce a great deal of gold-price volatility but, in my book, it does not affect the long-term price trend. What governs the price of gold over the long term are the market's real-world supply and demand fundamentals - and these have been decidedly bullish and are becoming even more so. Hence, my long-standing forecast of much higher gold prices in the next several years.

Importantly, to the gold-price outlook, today's buyers, both private investors and central banks, are likely to be long-term holders. Much of this gold, once bought, is unlikely to be resold any time soon even at much higher price levels. For central banks, the holding period will be measured in decades if not longer. This promises less liquidity, more volatility, and much higher prices in the years ahead.

Jeffrey Nichols, Managing Director of American Precious Metals Advisors, has been a leading gold and precious metals economist for over 25 years.

Daily Report: Dollar Extends Rally as Crash in Metals and Stocks Continue

Dollar extends recent rally and rises broadly as the week starts as risk aversion continues to dominate the markets. Investors' sentiments received no boost from the week's IMF/World Bank annual meeting as policymakers are divided on what to do on tackling the current crisis. PBoC Governor Zhou's comment over the weekend reflected that China is still deeper concerned with inflation and sends China stocks to lowest level since July 2010. Aussie and Kiwi are hardest hit today, by the crash in precious metal markets as well as wider than expected trade deficit from New Zealand.

At the meeting over the weekend, IMF called for world policymakers to 'act now and act together' to resume global economic recovery. The world lender said that 'the global economy has entered a dangerous phase, calling for exceptional vigilance, coordination and readiness to take bold action from members and the IMF alike'. World Bank President Robert Zoellick stated that 'the world is in a danger zone' while UK Chancellor George Osborne European leaders had 6 weeks to end the crisis as credible solutions are required to be ready by the next G20 summit in Cannes on November 4. News reports said that German and French leaders have come to some news plans of resolving the sovereign crisis in the 17-nation region. The measures include recapitalization of European banks, expansion of the EFSF to as much as 2 trillion euro and a partial default of Greek debts. Yet, the measures were not verified.

PBoC Governor Zhou Xiaochuan said that "high inflation remains the top concern in China" and there is no "immediate" way to control inflation. China is facing challenges from "relatively fast rises in consumer prices and relatively large amount of capital inflows in the short term". Zhou noted that is "no need for a fundamental change in the monetary or fiscal policies", suggesting China will continue to tighten to curb inflation. Regarding European debt crisis, Zhou noted that he's see if " euro-zone countries can implement their July 21 decision" before determining how China can further help.

The crash in commodity markets since last week is having much pressure on commodity currencies, in particular Aussie. Gold is diving another -5% today and is now trading at around 1550 level, way off the historical high made just weeks ago above 1900. Silver is even weaker as it's losing over -11% today so far. There is no help to Kiwi after reporting wider than expected trade deficit of NZD -641m in August. RBNZ will definitely refrain from further removing policy accommodation in near term while there are already some speculations that RBA would even cut rates within the next six months.

EUR/JPY Daily Outlook

Daily Pivots: (S1) 102.47; (P) 103.09; (R1) 103.95; 

EUR/JPY's fall resumes after brief consolidations and dips to as low as 101.93 so far. Intraday bias is back on the downside for 100 psychological level first and then next near term target at 100% projection of 111.93 to 103.88 from 106.98 at 98.93. On the upside, above 103.75 minor resistance will turn bias neutral again and bring consolidations. But recovery should be limited by 106.98 resistance and bring fall resumption.

In the bigger picture, whole down trend from 2008 high of 169.96 is still in progress and is building up downside momentum again. Sustained trading below 100 psychological level should pave the way to 100% projection of 139.21 to 105.42 from 123.31 at 89.52, which is close to 88.96 all time low. On the upside, break of 123.31 resistance is needed to confirm trend reversal or we'll stay bearish.

EUR/USD Daily Outlook

Daily Pivots: (S1) 1.3422; (P) 1.3494 (R1) 1.3570; 

EUR/USD's fall resumes after brief consolidations and dips to 1.3362 so far today. Intraday bias is back on the downside for 61.8% projection of 1.4548 to 1.3498 from 1.3936 at 1.3287 and then 161.8% projection of 1.4939 to 1.3969 from 1.4548 at 1.2979, which is close to 1.3 psychological level. On the upside, above 1.3566 minor resistance will turn bias neutral and bring consolidations. But recovery should be limited below 1.3936 resistance and bring fall resumption.

In the bigger picture, current development indicates that medium term rise from 1.1875 has completed with three waves up to 1.4939 already. That also suggests that it's merely part of the consolidation pattern that started back in 2008 at 1.6039. Further decline would now be seen to 1.2873 support first and break will target 1.1875 and below. On the upside, above 1.4548, resistance is needed to confirm completion of the fall from 1.4939 or we'll stay bearish in EUR/USD.

GBP/USD Daily Outlook

Daily Pivots: (S1) 1.5349; (P) 1.5420; (R1) 1.5513;

Intraday bias in GBP/USD remains neutral for the moment and some more consolidations would be seen above 1.5327 temporary low. Nevertheless recovery is expected to be limited below 1.5868 resistance and bring fall resumption. Break of 1.5327 will target 161.8% projection of 1.6746 to 1.5780 from 1.6618 at 1.5055 next.

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 1.4229 resistance should be seen. Break of 1.4229 will bolster the down trend resumption case and would possibly push GBP/USD through 1.3503 low. On the upside, break of 1.6618 resistance is needed to invalidate this view. Or we'll now stay cautiously bearish in GBP/USD.

Economic Indicators Update

GMT	Ccy	Events	Actual	Consensus	Previous	Revised
21:45	NZD	Trade Balance (NZD) Aug	-641M	-321M	129M	111M
8:00	EUR	German IFO - Business Climate Sep		106.5	108.7
8:00	EUR	German IFO - Current Assessment Sep		115.5	118.1
8:00	EUR	German IFO - Expectations Sep		97.4	100.1
14:00	USD	New Home Sales Aug		295K	298K