Daily Report: Dollar Weak as Risk Appetite Lifted by Solid Asian Data

Dollar remains broadly weak as the week starts as markets sentiments are boosted by solid Asian economic data. The preliminary HSBC China Manufacturing PMI rebounded from 49.9 to 51.1 in October, back in expansionary territory for the first time since July. HSBC noted that the data confirmed their view there is no risk of hard landing in China. Japan trade deficit narrowed to JPY -0.02T in September. Impressively, exports rose 2.4% yoy, marking the second month of growth following five month decline after the March natural disaster. Asian stock indices are broadly up today, partly following the QE3 triggered rally in US last week. Nikkei is up 1.9%, HSI up over 4%, Aussie All Ordinaries up 2.62%, crude oil is back above 88 level while dollar index is pressing 76.

After the EU summit on Sunday, no agreement was made on major issues including bank recapitalization, private sector involvements in Greece second bailout and the way to boost the EFSF. Though, one thing seemed to be sure is that using ECB to leverage the bailout fund is ruled out. The latest news flow said that policymakers are threatening to trigger a formal default on Greek debt unless banks accept losses of as much as 140B euro on their holdings or a haircut of around 50%. Both Reuters and Bloomberg also quoted the need of around 100B euro for bank recapitalization. The Reuters report also mentioned a haircut of 50% but emphasized that 'several major areas of disagreement remain', especially in the EFSF plan and 'it will require vast amounts of hard negotiation between Sunday and Wednesday to strike a deal that convinces financial markets and Europe's major trading partners that the crisis is in hand' while according to the Bloomberg report policymakers are heading toward using the EFSF to 'guarantee bond sales as a way to extend its reach. A second option is to set up an EFSF-insured fund that would seek outside investment in troubled bonds'. 

Data from Australia saw PPI rose less than expected by 0.6% qoq, 2.7% yoy in Q3. The year over year rate was much lower than Q2's 3.4%. The data is arguing inflationary pressures have eased further in Australia. RBA would be on hold for longer than expected and is raising the prospect of a rate cut if global economic conditions deteriorate further. Though, the CPI data to be released later this week will be more crucial in near term rate outlook.

Looking ahead, Eurozone PMI data will be the main focus. German PMI manufacturing is expected to drop slightly to 50 in October PMI services is expected to recovery to 49.8. Eurozone PMI manufacturing and services are expected to drop to 48.1 and 48.5 respectively. Eurozone industrial orders are expected to rise 0.1% mom in August.

EUR/AUD Daily Outlook

Daily Pivots: (S1) 1.3350; (P) 1.3424; (R1) 1.3463;

EUR/AUD's fall from 1.4086 resumed by taking out 1.3368 and reaches as low as 1.3327 so far today. Intraday bias is back on the downside and further decline should be seen to retest 1.3022 support next. On the upside, note that break of 1.3497 resistance, though, will indicate short term bottoming, possibly on bullish convergence condition in 4 hours MACD, and will bring stronger rebound.

In the bigger picture, price actions from 1.2926 are treated as a medium term consolidation pattern, which is still in progress. Such pattern might extend further in range of 1.2926 and 1.4341. Nevertheless, we'll stay bearish as long as 1.4341 resistance holds and favor an eventual downside breakout. Sustained trading below 1.2926 should pave the way to 1.2 psychological level next. 

Economic Indicators Update

MT	Ccy	Events	Actual	Consensus	Previous	Revised
23:50	JPY	Trade Balance (JPY) Sep	-0.02T	-0.11T	-0.29T	-0.27T
0:30	AUD	PPI Q/Q Q3	0.60%	0.80%	0.80%
0:30	AUD	PPI Y/Y Q3	2.70%	2.90%	3.40%
4:00	CNY	HSBC Flash China Manufacturing PMI Oct	51.1		49.9
7:30	EUR	German PMI Manufacturing Oct A		50	50.3
7:30	EUR	German PMI Services Oct A		49.8	49.7
8:00	EUR	Eurozone PMI Manufacturing Oct A		48.1	48.5
8:00	EUR	Eurozone PMI Services Oct A		48.5	48.8
9:00	EUR	Eurozone Industrial New Orders M/M Aug		0.10%	-2.10%

Aussie Dollar in a Copper Cauldron!

I keep thinking that any day now the Australian dollar will take a dirt nap. It took one back in mid-2008, falling a stunning 39 percent in just three months in the midst of the credit crunch. This shows just how vulnerable the Aussie can be to a growth accident that slams the world economy; it is the premiere risk currency among the major dollar currency pairs.

Global growth is fading fast again, and copper seems to be highlighting that story. It could be lights out for the Aussie again if that’s the case.

As you can see in the chart below, the copper futures weekly uptrend line is broken, and the primary trend is down. The yellow rectangular box shows what happened in the midst of the great credit crunch of 2008.

And as you may know, copper is considered a key industrial metal; its price movement is often used as an indicator of the direction of growth in the global economy.

Copper Has Taken on an
Important Role in Financing

An increasing number of Chinese firms have been stockpiling the metal and using it as collateral — because the government’s measures to curb inflation have limited the firms’ access to credit. Such financing links the price of copper to other key elements of the Chinese economy, including the growing speculative real estate bubble.

China’s tightening monetary policy has made it more difficult to access credit through official channels. As a result, Chinese small- and medium-size enterprises have increasingly turned to copper for use as collateral in loans, which are then funneled into other sectors of the economy.

The falling price of copper means that the collateral initially put up for the loans in yuan is no longer worth what it once was, decreasing the likelihood that the borrower will be able to pay back the loan.

If firms default on debts, then others connected in the chain will default — and determining where loans have been invested is nearly impossible.

Banks and state-owned enterprises (SOEs) are also potentially vulnerable. A high number of SOEs have also used copper as collateral. These firms are often involved in the real estate sector — even if their primary function is not always directly linked to it — and are therefore exposed to the country’s growing real estate bubble. 

The government would bail out the more politically favored SOEs if necessary. But that would leave fewer resources to be allocated to the private sector, which is crucially important to China’s growth.

It is all about feedback loops. And …

This One Could Turn Quite Vicious
for China and In Turn the Aussie Dollar!

The Australian economy is highly dependent on China for its own growth. For a while now, I’ve been saying that Australia has effectively become a satellite country of China. Take a look at this chart showing China’s imports from Australia thru September. 

Lower copper prices could put a real damper on Australia’s growth. Another major hit is already in play: Falling consumer demand from the euro zone and the U.S.

And if the bubble were to finally pop in Chinese real estate, it would be much uglier indeed.

So we have the potential for real demand in copper and other commodities to decline sharply. Toss in the added thumping from the internal Chinese speculation, which would likely push the metal back toward its credit crunch low, and you get another 50 percent decline in the red metal.

And guess which currency has been tightly correlated to the price of copper over the last few years? If you said the Aussie dollar, you were right on!

There are two key takeaways from the following chart of the Aussie/U.S. dollar vs. copper:

1) There is a very large divergence between the two price series; and

2) In the past the series have been highly correlated.

I suspect we will see a big move one way or the other. It could be copper soars. But for now, I’m betting the Aussie tanks.

Stay tuned.

Jack

Market Salutes Mass Confusion with Further Risk Rally

The coming “solution” to the EU’s debt crisis is creating ever mounting piles of research outlining the if’s, and’s and but’s – so the market shrugs its shoulders and says “they’ll figure something out.”

The discussion surrounding the potential form of the EFSF has become an endlessly confusing cacophony for which readers can find far better sources than this column to review and understand all of the various nuances of the proposed solutions and the questions outstanding. The bulls have largely made their case on the potential outcome for what is now next Wednesday (Summit, part Two) with the extensive rally in the rear view mirror. The bears are licking their wounds and still running for cover. The essential bottom for the bigger picture here boils down to three interlocking questions, none of which are likely to be answered beyond the next couple of weeks to couple of months, in my view.

Confidence? All of the solutions rely on the market’s confidence and the hope that officialdom has gone far enough in back-stopping sovereign debt to a sufficient degree far more than the actual deployment of funds. The solution is more one of – if something goes wrong, we’ll be there – trust us! It works as long as market participants believe it will work, in other words. But if enough confidence is lost and the actual mechanisms are being tested, is there really enough firepower in place? Which leads us to the next question…

Where is the money? The issue of leverage has not been resolved. Yes, an all-out money printing fiesta from the ECB or something closer to what the French wanted could have generated a more QE2-like large scale liquidity-induced rally, but none of the currently more likely sounding resolutions generate huge liquidity – only implied liquidity via backstopping. This is a highly complex, have-our-cake-and-eat-it-too tight money solution to the situation.

A closer union or not?  The risk at all times given the incredibly cumbersome EU framework is one of one more bad actor spoiling the party – Greek exceptionalism in this department is an awfully risky assumption. Most are discussing Greek defaults only. Every round of this crisis has shown how tenuous the political EU framework remains, and the trend doesn’t appear to be toward a firmer commitment to union, but rather the opposite. The framework may survive this round, but what about the next one?

These are awfully big questions. Yes, we could see confidence for a time because yes, there may be enough funding for the center to hold – but the third question is the real challenger down the line. If the confidence fails because more money is needed or more money is needed because confidence fails, the political will for another round of bailouts is unlikely to be there as our Chief Economist said in yesterday’s Chronicle – maximum intervention will eventually yield to Crisis 2.0, whether it is in this quarter or not until next year.

Meanwhile, back in the East
Two things going on in Asia at the moment: China’s equity market is looking very shaky and satellite indicators like the price of copper are a significant cause for concern, particularly given copper’s odd use in China’s collateralized credit market in recent years. Meanwhile, AUDUSD is following equity markets and the Euro-phoria rather than its more traditional orientation with industrial commodities – an awkward path at best for the currency. The direction of AUDUSD and copper/China indicators is unlikely to diverge for much longer – one of the two markets is “wrong”.

Elsewhere, complacent USDJPY longs were attacked in the early US hours as the USD was crumbling across the board in today’s trade as risk appetite stormed higher and 76.0 was taken out as USDJPY briefly touched a new all-time low. There is risk of further downside if Japanese officialdom prefers to wait for the other side of the G20 to make its presence more forcefully felt. The move lower is actually at odds with the interest rate spreads at the short end of the US/Japanese yield curves, though there has been a general move away from these kinds of correlations holding much sway of late.

Looking ahead
So what are the potential outcomes once we are on the other side of next week’s EU summit and the G20 in early November? A further extension of the rally for the shorter term is quite possible if the EU solution continues to generate more complacency – so we have to allow for, for example, EURUSD to challenge anything from its 55-day MA above 1.3900 to its 200-day MA above 1.40. But that’s our line in the sand, as we discuss in the chart below.

EURGBP pulled a number on the market today – as EURGBP took out downside stops before rallying well back into the range, a move that makes sense as GBP and USD are in similar boats and their general direction versus the EUR is likely to remain loosely correlated at minimum.

Chart: EURUSD scenarios
Assuming that the EURUSD isn’t preparing for a full trend change to the upside, the scenario indicated on the chart below is a possible trajectory for the pair – a brief further extension of the rally as we head into/out of the EU Summit followed by a reversal and then disappointment further down the line. If the pair remain above 1.40 for any length of time, we’ll have to reconsider our assumptions.

Have a great weekend and stay careful out there.


Economic Data Highlights

• Germany Oct. IFO out at 106.4 vs. 106.2 expected and 107.4 in Sep.
• Canada Sep. CPI out at +0.2% MoM and +3.2% YoY vs. +0.2%/+3.1% expected, respectively and vs. +3.1% in Aug.
• Canada Sep. CPI Core out at +0.5% MoM and +2.2% YoY vs. +0.2%/+2.0% expected, respectively and vs. +1.9% YoY in Aug.

Upcoming Economic Calendar Highlights (all times GMT)

• US Fed’s Kocherlakota to Speak (1700)
• US Fed’s Fisher to Speak (1720)
• US Fed’s Yellen to Speak (1900)
• US Fed’s Duke to Speak (Sat 1400)
• Japan Sep. Merchandise Trade Balance (Sun 2350)
• Australia Q3 Producer Price Index (0030)
• China Oct. HSBC Flash Manufacturing PMI (0230)

Stocks Fly as Fitch preserves French AAA Rating for Now

Fitch does not see EFSF plans changing France's AAA Rating
European stocks were slightly up in the early session before Fitch announced that it does not see changes to the European Financial Stability Facility as a threat to France's AAA rating, and that a strong EU solution would likely preserve Spain's and Italy's ratings as well. Following Fitch's announcement the DAX Index jumped 1.7 percent.

GE meets expectations on finance unit; McDonald's delivers as always
GE reports 3Q operating EPS 0.31 in line with estimates of 0.31 as improvements in GE Capital offset weakness and margin contraction in its energy division. Investors are slightly disappointed sending the shares down 1.4 percent in pre-market trading.

McDonald's delivers what the market always wants, namely better-than-expected earnings, as the company reports 3Q EPS 1.45 beating estimates of 1.43 driven by market-share gains across the globe. The shares are up 2.9 percent in pre-market trading.

Other earnings releases out in pre-market are:

• Schlumberger reports 3Q operating EPS from continued operations of 0.98 missing estimates of 1.01.
• Verizon reports 3Q operating EPS 0.56 beating estimates 0.55

Why the Gold Selloff is Not Over Yet

At this point, I think it's pretty clear the general stock market is now in the initial phase of a new bear market. It's trying to generate a bear market rally over the last three weeks, but so far it's been pretty weak. That doesn't bode well once the cyclical and secular bear trend resumes.

The HUI mining index is now on the verge of breaking down out of the multi-month megaphone topping pattern. Once it does, that will confirm that the bear now has his teeth in the last holdout sector. The sector that led the bull market over the last 2 1/2 years and now the last sector to succumb to the deflationary forces.

As I have noted in the chart, I do expect the miners will find at least temporary support at the 200-week moving average. That should correspond with gold putting in an intermediate degree bottom sometime in the next two or maybe three weeks. Presumably, it will come with gold below...

Read full article (with charts)...

Non-partisan gov't report shows the Federal Reserve is even worse than we thought

The non-partisan Government Accountability Office released a report today showing widespread corruption and conflicts of interest in the Federal Reserve.

Senator Sanders – who was instrumental in forcing the Fed to release some details of its lending operations – summarizes:

A new audit of the Federal Reserve released today detailed widespread conflicts of interest involving directors of its regional banks.

"The most powerful entity in the United States is riddled with conflicts of interest," Sen. Bernie Sanders (I-Vt.) said after reviewing the Government Accountability Office report. The study required by a Sanders Amendment to last year's Wall Street reform law examined Fed practices never before subjected to such independent, expert scrutiny.

The GAO detailed instance after instance of top executives of corporations and financial institutions using their influence as Federal Reserve directors to financially benefit their firms, and, in at least one instance, themselves. "Clearly it is unacceptable for so few people to wield so much unchecked power," Sanders said. "Not only do they run the banks, they run the institutions that regulate the banks...

Read full article...

This Country's Banks Could Offer Europe's "Best Place to Hide" from the Euro Crisis

Nordic banks may offer investors the best protection against a recapitalization wave that threatens to dilute the share values of Europe's lenders, said UBS AG. (UBSN)

"It is a very attractive place for European investors to hide from the ongoing eurozone problems," Nick Davey, a London-based analyst at UBS, said in an interview.

Scandinavian banks, including Nordea Bank AB (NDA) and DnB NOR ASA (DNBNOR), have negligible holdings of bonds sold by Europe's most indebted nations and are better capitalized than most of their European peers. Nordea Chief Executive Officer Christian Clausen said this week his bank has no plans to sell shares. At the same time, Nordic governments have some of Europe's smallest budget deficits. Norway has the biggest budget surplus of any AAA rated nation, offering an extra layer of protection to investors.

Shares in DnB NOR rose 3.2 percent to trade at 62.95 kroner as of 10:59 a.m. in Oslo, outperforming the 46-member Bloomberg index of European financials, which gained 1.9 percent. Nordea rose as much as 1.8 percent, before trading 0.6 percent higher in Stockholm.

In Norway, "the banking industry has a good solvency position, satisfactory profitability and low loan losses," the head of the country's financial regulator, Morten Baltzersen, said in an interview. "These factors provide a good starting point to meet potential challenges."

'No Immediate Need'

Swedish Finance Minister Anders Borg said Oct. 18 he sees "no immediate need" for the country's banks to raise their capital buffers.

The European Union may require banks in the region to increase core capital ratios to 9 percent of their risk-weighted assets, according to a person with knowledge of the plans. The deadline for meeting the increased capital levels may be the middle of next year, German Finance Minister Wolfgang Schaeuble told a closed parliamentary committee this week, according to two lawmakers who attended the meeting. That's almost seven years ahead of the target set by the Basel Committee on Banking Supervision.

Nordea, the biggest Nordic lender, had a core Tier 1 capital ratio – a measure of financial strength – of 9.2 percent in the third quarter. DnB NOR had a capital adequacy ratio of 11.7 percent at the end of the second quarter, the most recent reported figures show.

Sidestepping EU

Nordea passed the European Banking Authority's July stress tests with a 9.5 percent capital ratio, almost twice the minimum requirement of 5 percent. DnB NOR passed with a 9 percent ratio. Another round of exams would help European leaders identify capital needs.

Sweden's lenders need to maintain higher capital levels than their foreign peers because the country's bank industry is four times the size of the economy, Financial markets Minister Peter Norman said in Stockholm today.

The country is also ready to sidestep European Union efforts to impose caps on capital buffers beyond minimum ratios set by the Basel Committee on Banking Supervision, said Lars Frisell, chief economist at the Financial Supervisory Authority.

Sweden "will of course use pillar 2," which focuses on risk management, to enforce higher capital requirements for its banks if the country is unable to do so under pillar 1, Frisell, who is also a member of the Basel Committee, said at an event in Stockholm today.

Tapping Debt Markets

Nordic banks are among the few in Europe still able to tap wholesale funding markets. Two Swedish lenders issued senior unsecured notes last week; SEB AB sold 750 million euros ($1.03 billion) in floating rate notes due in 2013, while Svenska Handelsbanken AB (SHBA) sold 1.25 billion euros in notes due in 2021.

"That sends a pretty clear message to the market: we are amongst the few funding safe havens still left standing in the European banking index," Davey said.

Besides Nordic lenders, Germany's Deutsche Bank AG and Commerzbank AG (CBK) have sold unsecured debt since September, as have London-based HSBC Holdings Plc (HSBA) and Rabobank International of the Netherlands.

Banks in Norway and Sweden "have very little that they need to demonstrate in this round of stress tests," Davey said. "Capital ratios already have extremely thick buffers above this required hurdle rate and they simply don't have a lot of exposure to volatility to sovereign debt prices."

Raising Capital

Europe's banks may need to raise 150 billion euros ($205 billion) to 230 billion euros to meet additional capital requirements, Kian Abouhossein, a JPMorgan Chase & Co. analyst in London, wrote in an Oct. 1 note.

The EBA estimates Europe's banks need to an additional 70 billion euros to 90 billion euros in capital, the Financial Times reported yesterday, citing people familiar with the talks.

Nordea has "no direct exposure" to bonds sold by Portugal, Italy, Ireland, Greece or Spain, it said on Oct. 19. Norway's six largest banks hold less than 1.3 percent of their managed capital in assets from those countries, the financial regulator said in June.

Norway, which channels most of its oil income into a $530 billion sovereign-wealth fund, has been shielded from the worst of the euro area's debt crisis, helping keep unemployment below 3 percent, Europe's lowest rate. This has allowed banks such as DnB NOR, the country's biggest, to benefit from lower risk premiums than the rest of Europe, the Financial Supervisory Authority said last month.

No Crisis

"The Norwegian banking industry is clearly not in a state of crisis," Baltzersen said.

Lenders including Deutsche Bank AG (DBK) have said they oppose recapitalization because it would dilute existing shareholders without addressing the risk of sovereign debt defaults. BNP Paribas SA and other banks have said they can meet increased capital requirements without cash injections.

Concerns over a potential default by Greece and contagion in other debt-ridden nations have pushed the 46-member Bloomberg Europe Banks and Financial Services Index down 31 percent this year. DnB has lost 23 percent and Nordea has dropped 24 percent.

Norwegian banks' "situation is quite solid, especially in relative terms compared to an average European bank," Oeystein Olsen, the governor of the central bank of Norway, said in an interview this week.

"The further down the road we get the more the Norwegian sovereign wealth looks like an attractive backdrop in which to operate," Davey said.

To contact the reporter on this story: Josiane Kremer in Oslo at jkremer4@bloomberg.net.

To contact the editor responsible for this story: Tasneem Brogger at tbrogger@bloomberg.net.

Daily Report: Sentiments Reversed Again as Expectations for EU Summit Change

News from Eurozone continues to drive markets up and down. This time, sentiments were hurt by reports that France and Germany are clearly still having diverged stance on the role of ECB in solving the debt crisis. France is still pushing the proposal to have the EFSF turned into a bank licensed with ECB for leveraging the capacity. But Germany maintained its opposition to this idea. And European officials are playing down the expectation for this weekend's EU summit. German Chancellor Angela Merkel stated that 'it won't be the final point where we regain the confidence of others, but it will be a stepping stone, a marker on the road' and 'all of the sins of omission and commission of the past cannot be undone by waving a magic wand'. EC President Jose Barroso also said that 'even if we do arrive at a political decision on everything that's on the table, which I hope we will, that doesn't necessarily mean that there will not then have to be an implementing phase'.

The US monthly Beige Book covering the period on the before October 7 indicated that many districts described the pace of growth as 'modest' or 'slight' and there was higher uncertainty for business decision making, although economic activities continued to expand. Consumer spending improved 'slightly' in most districts as driven by auto sales and tourism. Business spending also increased due to the rise in expenditure in construction and mining equipment and auto dealer inventories. Yet, restraints in hiring and capital spending remained. While the October report may be slightly better than the previous one, economic outlook on the US remained uncertain and is highly determined by global factors. 

It's reported that Japan will set up a task force to tackle the problems caused by yen's persistent strength. The task force will involve vice cabinet ministers and a BoJ deputy governor. The fund shifted to state-run Japan Bank for International Cooperation to help exporters would be boosted by 25% from JPY 8T to JPY 10T. In addition, there was also call for BoJ to use "bold" monetary policy in close coordination with the government to manage the yen.

On the data front, UK retail sales will be a main feature in European session, together with Swiss ZEW expectations. From US, initial jobless claims are expected to remain elevated at 400k. Existing home sales is expected to drop to 4.90m in September, leading indicator rose 0.2%. Philly Fed survey is expected to improve to -9.5 in October.

EUR/JPY Daily Outlook

Daily Pivots: (S1) 105.15; (P) 105.84; (R1) 106.36; 

At this point, we're still favoring the case that EUR/JPY's rebound from 100.74 is finished at 107.67 already. Below 104.77 will extend the fall from 107.67 to retest 100.74 low first. On the upside, though, above 107.67 will invalidate this immediate bearish view and bring another rise. But upside should be limited by 38.2% retracement of 123.31 to 100.74 at 109.36 to finish off the rebound.

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 111.93 resistance is needed to be the first signal of medium term reversal. Otherwise, we'll stay bearish. 

Economic Indicators Update

MT	Ccy	Events	Actual	Consensus	Previous	Revised
0:30	AUD	NAB Business Confidence Q3	-4		6	5
6:00	EUR	German PPI M/M Sep	0.30%	0.20%	-0.30%
6:00	EUR	German PPI Y/Y Sep		5.50%	5.50%
6:00	CHF	Trade Balance (CHF) Sep		1.37B	0.81B
8:30	GBP	Retail Sales M/M Sep		0.20%	-0.10%
8:30	GBP	Retail Sales Y/Y Sep		0.60%	-0.10%
8:30	GBP	Retail Sales w/Auto Fuel M/M Sep		0.00%	-0.20%
8:30	GBP	Retail Sales w/Auto Fuel Y/Y Sep		0.60%	0.00%
9:00	CHF	ZEW Survey (Expectations) Oct			-75.7
12:30	USD	Initial Jobless Claims		400K	404K
12:30	CAD	Wholesale Sales M/M Aug		0.40%	0.80%
14:00	EUR	Eurozone Consumer Confidence Oct A		-20.1	-19.1
14:00	USD	Existing Home Sales Sep		4.90M	5.03M
14:00	USD	Leading Indicators Sep		0.20%	0.30%
14:00	USD	Philly Fed Survey Oct		-9.5	-17.5
14:30	USD	Natural Gas Storage		111B	112B

GBPUSD - Cautiously Bearish below 1.5787

Wednesday’s reversal of initial downside was extended yesterday but this demand stalled ahead of last week's highs. The subsequent setback corrected half of early gains for GBPUSD and this change in investor sentiment has continued in Asia, with positive momentum showing signs of reversal too. In view of this our call is Cautiously Bearish while below 1.5787. The immediate objective is 1.5711 with a move beneath that point targeting yesterday's 1.5697 low or even towards this week's bottom at 1.5632.
The risk to this call is that selling pressure stalls although a fresh outright Buy signal would only be generated by a move through 1.5787, the overnight high. Prices and sentiment should then improve to 1.5811 then last week's 1.5854 top.

Action, not words, required to take pressure off the EUR

An element of doubt came back into the mind of market participants Monday as (in particular, German) officials began to raise the possibility that the much vaunted ‘grand plan’ (which the rhetoric and inference by eurozone leaders commentary has been since the initial formulation by Merkel and Sarkozy on the 9^th October) may not be the all-encompassing solution to the woes of the eurozone.
German Government spokesman Seibert stated “Dreams of a swift Euro solution won’t materialise”. In conjunction with the German Finance Minister’s statement that the “upcoming EU summit will not present [a] final solution for [the] eurozone debt crisis.”  Both comments added to the weigh of an already seemingly faltering EUR.
Broader risk assets also struggled yesterday as concerns filtered through into the banking sector, despite the significantly better than expected Q3 earnings figures from Citigroup. With little in the way of top tier data this week, headlines will continue to dominate sentiment. A clear example of this was seen yesterday when a Der Spiegel online article suggested that “top German economists are warning that France’s AAA rating could be in danger should additional measures become necessary to prop up indebted eurozone members of to save ailing banks.” This is not a new concept and, indeed, it is one which I have discussed on this page a number of times. But the timing of the story into a market already feeling vulnerable top bad news exacerbated the impact.
This morning the spread between French and German 10 year yields has hit another new record at 100bps and despite Finance Minister Baroin’s protestations that France will do “everything” to maintain its debt ratings, we have reached a pinnacle. We have reached the point at which the rousing, determined words of officials are no longer enough; a point where action is needed.  Schaeuble’s words yesterday, that seem to have undone all the calming work of the G20, could well see the EUR decline back to the lows, seen before the irrationally exuberant, Merkozy-inspired rally, over the next week.
In China overnight data came in better than broad expectations as Industrial Production and Retail Sales data picked up again in September after a decline in August.  Fixed Asset investment was broadly stable yet GDP for Q3 slowed to 9.1% (its slowest pace since 2009). Whilst GDP growth is the envy of the developed world it is widely believed that the structure of the Chinese Economy requires it to maintain growth above 8% to maintain stable unemployment. The current easing of growth saw interest rate swaps fall as, in addition to a marked slowdown in money supply and an easing in inflation, the market has begun to price in a halt to monetary tightening in order to support growth.
In the UK today we get CPI data for September, where the market is expecting a print close to the 5%, up from 4.5% in August. In the eurozone we await the ZEW economic sentiment index but as I suggested yesterday the current market is not driven by the data but predominantly by the politics and that will continue until we get a resolution in the eurozone.

For the rest of the week I would anticipate that the EUR, in particular, but broad risk assets (including the AUD) will underperform, and after the capitulative deleveraging rally of last week, the support on the downside is likely more fragile than before. I still favour EURGBP throughout this week, but risk off sentiment is likely to pick up as we approach the weekend.

Correlated GBPUSD & GBPJPY Could Offer Shorting Opportunities

Both GBPUSD and GBPJPY have been moving in tandem and we had a clear downside break Monday. Any correlated pullback to the line could be seen as a chance to short with tight stops in place.

Placing lines is never an exact science so having two charts for reference will be a help for fine tuning the entry point.

Weekly Commodities Update : Commodity Pessimists Feel the Squeeze as Futures Rally

The dramatic rally in riskier assets continued last week with stocks and commodities rallying hard while bonds sold off. Improved U.S. economic data has given traders enough confidence to believe that a recession is now more or less out of the question. The 23 October EU summit is expected to yield a substantial announcement and European politicians therefore have got less than a week to hammer out a sustainable strategy to finally get the European debt crisis under control.

So far the market has been prepared to believe that a solution is coming and stock markets have responded in a dramatic fashion while the dollar has dropped out of favour, at least for now. The main downside risk now lies with another round of extreme risk aversion, which could spark broad-based liquidation, as in September.

The Reuters Jeffries CRB index is four percent higher over the past week and in just two weeks the index has rallied 8.5 percent from the early October low. Some of the rally can be explained by the dollar - which has slumped by 4 percent during the same time. The agriculture sector which, surprisingly, had seen long exposure being reduced dramatically over the last couple of months, rose the most as traders returned to rebuild long exposure, especially in corn, soybeans and rice.

Speculative positions reduced despite rally
Another reason for the strong rally in commodities over the past week has been due to hedge funds and large investors rebuilding long positions. Recent data (to 11 October) from the CFTC shows that exposure to commodities fell to the lowest level since September 2009. The data was compiled at a stage where the rally was into its second week, showing that speculators had continued to offload positions and most likely would have spent the remainder of the week rebuilding exposure thereby adding to the upside pressure.

Brent crude approaching critical level
The ongoing speculation about a solution to the European debt situation and improved U.S. economic data continued to drive oil markets last week. With the dreaded fear of recession having moved to the backseat investors has been piling back into the black gold.

Brent crude outperformed U.S. WTI crude on a combination of continued tightness in the European markets together with news from Dow Jones UBS that its commodity rebalancing at the beginning of 2012 will support Brent crude. The DJ-UBS is estimated to have around 80 billion dollars of funds tracking the commodity index and they announced that the weighting of WTI will be reduced from 14.7 to 9.7 percent while Brent crude will be added for the first time with a weighting of 5.3 percent. The adjustments to its positions will take place between the fifth and the ninth working day of January and could result in the Brent WTI spread widening back out to its recent record given that many other fund managers will adapt the same strategy.

Technically Brent crude will find tough resistance ahead of 115 dollars per barrel as it seems to have moved ahead of levels that current economic activity can justify. 

Gold slow recovery continues
Investors continued to regain some of the confidence that was lost after the biggest slump in three years. Their return to gold was highlighted in the last week's CFTC data which showed that long exposure to gold was increased for the second week in a row. After having been a clear choice for months its relation to risk has confused many over the last month as gold has moved in line with other riskier assets.

Its strength will be tested soon as we approach resistance around 1,700 dollars per ounce. Gold priced in Euros has traded flat over the past two weeks indicating that much of the new found strength has been down to dollar weakness and on that basis further progress could slow down as the Euro approaches strong resistance at 1.3950 versus the dollar.

Crops rally from oversold situation
Crops like corn, soybeans and rice, were the main performers last week as exports kicked back to life, especially to China, while the United States Department of Agriculture in a report forecast a smaller-than-expected 2011/12 production for corn and soybeans. The price of wheat continues to suffer amid ample supply both in the U.S. and the world. The dramatic fall in prices have led U.S. farmers to hold back some of their production hoping that reduced supply eventually will trigger higher prices.

The latest data from the CFTC showed that investors continued to dump agriculture commodities despite the ongoing recovery, something that will add to the momentum if and once a rally takes hold.

Gold's Schizophrenia: Pulled Apart By Commodity And Safe Haven Status

Agustino Fontevecchia

www.forbes.com

Gold appears to have entered a new phase, acting as a hybrid, sometimes sympathizing with risk assets and other times acting like a safe haven, UBS' Edel Tully explains. While this makes it incredibly difficult to trade the yellow metal, the gold strategist remains bullish.

After falling about $20 on Tuesday in response to a stronger dollar, gold recovered its footing on Tuesday, hitting $1,693.90 an ounce, its highest level in two weeks. By 1:25 PM in New York, the yellow metal had given up some of those gains and was trading up $19.50 or 1.17% to $1,679.20 an ounce.

Gold's relentless climb, when any and all headlines seemed to fuel the precious metal's bull run, came to an end after peaking above $1,920 an ounce last August, falling almost 20% in a few weeks to bottom out around $1,562.

Still, the yellow metal remains up about 20% this year and most analysts remain bullish. It's as hard to explain gold's skyrocketing rise as it is its precipitous fall; UBS strategist Edel Tully notes gold is now behaving like a hybrid, acting as commodity or safe haven as investors try to find balance amid opposing forces.

Tully had said she expects gold to hit $1,920 in a month and $2,100 in three months, but recognizes gold's safe haven't status isn't keeping it afloat anymore. "Trading the yellow metal [has become] very challenging, as while one can have a view on an event such as US payrolls for example, deciphering how gold reacts has become a lot more difficult. And while buyers are nimbly returning, it is no surprise that there is caution given the struggle for conviction."

Regardless, gold will continue to react to macroeconomic news, particularly in Europe. While the yellow metal barely flinched in reaction to Slovakia's failure to ratify the EFSF (markets appear to factor in a positive vote sometime this week), the Merkel-Sarkozy "comprehensive package" could be setting investors up for a big disappointment, Tully says. "And considering how gold has been behaving recently, market reaction to euro-negative developments will not be as straightforward as it has been historically."

Gold miners have been an alternative to holding physical gold, either via an ETF or through the physical metal. Miners continue to under perform bullion, though, with the Market Vectors Gold Miners ETF flat in the last three months compared with a 5% gain for the GLD gold ETF. Barrick Gold, GoldCorp, and Freeport McMoran are among some of the underperformers within the mining group.

Weekly Preview & Outlook : Forex Currency Pairs

EUR/USD Weekly Outlook

EUR/USD's rebound from 1.3145 short term bottom extended further to as high as 1.3893 last week and closed strongly. Initial bias remains on the upside this week and current rise should target 61.8% retracement of 1.4548 to 1.3145 at 1.4012, which is close to 1.4 psychological level. On the downside, break of 1.3685 minor support will indicate that such rebound has likely finished and should flip bias back to the downside for retesting 1.3145 low.

In the bigger picture, as this point, we're still favoring the case that whole rise from 2010 low of 1.1875 has completed at 1.4939. Fall from 1.4939 is viewed as resuming the whole corrective fall from 2007 high of 1.6039 ad should eventually take out 1.1875 support. However, the stronger than expected rebound from 1.3145 reduced our confidence on this scenario. Sustained trading back above 1.4 psychological level will argue that fall from 1.4939 is finished and the corrective nature in turns indicate that rise from 1.1875 is not over.

In the long term picture, EUR/USD turned into a long term consolidation pattern since reaching 1.6039 in 2008. Such consolidation is still in progress and we'd expect range trading to continue for some time between 1.1639 and 1.6039.

USD/JPY Weekly Outlook

Much volatility was seen in USD/JPY last week but the pair's rally attempt was limited at 77.48. Also, there is no follow through buying to help USD/JPY sustain above near term falling trend line yet. More choppy sideway trading could be seen between 76.11 and 77.48 initially this week. But we'll remain slightly bearish in USD/JPY as long as 77.48 resistance holds and favor an eventual downside break out through 75.94 support. Nevertheless, sustained break of 77.48 will argue that whole decline from 85.51 is possibly over and further rise would be seen back towards 80.23 resistance.

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.

In the long term picture, current decline suggests that the long term down trend in USD/JPY is still in progress. Such down trend is expected to extend further into uncharted territory with 70 psychological level as next target. In any case, we'd at least need to see sustained break of 85.51 before considering trend reversal.

GBP/USD Weekly Outlook

GBP/USD's rebound from 1.5271 short term bottom extended further to as high as 1.5817 last week and closed strongly. Initial bias remains on the upside this week and current rally should continue towards 61.8% retracement of 1.6618 to 1.5271 at 1.6103. On the downside, below 1.5666 minor support, though, will indicate that such rebound is likely finished and should flip bias back to the downside for retesting 1.5271 low first.

In the bigger picture, price actions from 1.3503 are treated as consolidations to long term down trend from 2.1161 and should be near to an end, if not finished at 1.6476. Near term outlook is quite mixed as the nature of the rebound from 1.5271 has many possibilities of roughly equal chance. But in any case, upside should be limited below 1.6618 resistance. Eventually, we'd expect a break of 1.4229 support to signal resumption of the down trend from 2.1161 and that should send GBP/USD through 1.3503 (2008 low).

In the longer term picture, the corrective nature of the multi-decade advance from 1.0463 (85 low) to 2.1161 as well as the impulsive nature of the fall from there suggests that GBP/USD is now in an early stage of a long term down trend. Another low below 1.3503 is anticipated after consolidation from 1.3503 is confirmed to be completed. 

USD/CHF Weekly Outlook

USD/CHF's fall last week confirmed short term topping at 0.9315. Initial bias remain son the downside this week and the pull back from 0.9315 should extend to 0.8647 and below. Though, we're expecting strong support above 0.8246 (50% retracement of 0.7065 to 0.9315 at 0.8190) to contain downside and bring resumption of rebound from 0.7065. On the upside, above 0.9039 minor resistance will argue that such pull back is finished and flip bias back to the upside for retesting 0.9315 first.

In the bigger picture, medium term down trend from 1.1730 is already completed at 0.7065. But there is no indication of long term reversal yet. Rebound from 0.7065 is treated as part of a medium term consolidation pattern. Such rebound would possibly extend to 0.9916/1.1730 resistance zone. But strong resistance should be seen there and bring reversal. On the downside, break of 0.8246 resistance turned support will indicate that rebound from 0.7065 is finished and should turn outlook bearish for a retest on this low.

In the longer term picture, long term down trend from 2000 high of 1.8305 is still in progress and there is no indication of a reversal yet. Such down trend would still extend to 100% projection of 1.8305 to 1.1288 from 1.3283 at 0.6266 after finishing the consolidation from 0.7065.

AUD/USD Weekly Outlook

AUD/USD rebounded further to as high as 1.0345 last week and closed strongly. Initial bias remains on the upside this week for near term falling channel resistance (now at 1.0389) first. Break there should pave the way to 1.0764 resistance and above. On the downside, below 1.0104 minor support will turn bias neutral and bring consolidations. But another rise will remain in favor as long as 0.9865 support holds.

In the bigger picture, AUD/USD drew strong support from 0.9404 despite a brief breach and the development retained bullish outlook in the long term. Whole up trend from 2008 low of 0.6008 is still in progress and price actions from 1.1079 should merely be a consolidation pattern. Having said that, though, we'd be cautious on reverse signal as AUD/USD enters into 1.0764/1079 resistance zone and there would be another near term decline before consolidation from 1.1079 finishes. But in any case, we'll stay bullish as long as 0.9387 support holds and favor an eventual upside break out.

In the longer term picture, whole up trend from 0.4773 (01 low) extended to a point where it just missed 100% projection of 0.4773 to 0.9849 from 0.6008 at 1.1084. While AUD/USD might be reversing in medium term, there is no signal of long term topping yet. We'd stay bullish as long as 0.9404 support holds and expect an eventual break of 1.1084 to 138.2% projection at 1.3023, which is close to 1.3 psychological level, in the long term.

USD/CAD Weekly Outlook

USD/CAD's fall from 1.0656 short term bottom extended further to as low as 1.0096 last week. Initial bias remains on the downside this week for 50% retracement of 0.9406 to 1.0656 at 1.0031. But we're expect strong support from there, which is close to 1.0009 support, parity and 55 days EMA (now at 1.0039) to contain downside and bring rebound. Above 1.0272 minor resistance will suggest that pullback from 1.0656 is finished and flip bias back to the upside for retesting this high.

In the bigger picture, that down trend from 2009 high of 1.3063 has finished at 0.9406 on bullish convergence condition in weekly MACD. Rise from 0.9406 should at least be part of a long term consolidation pattern from 2007 low of 0.9056 and should extend through 1.0851 resistance (38.2% retracement of 1.3063 to 0.9406 at 1.0803), possibly to 61.8% retracement 1.1666 and above. However, break of 1.0009 support will dampen this view and firstly, suggest that rebound from 0.9406 is finished. Secondly, such development will also argue that price actions from 0.9406 are merely consolidating the down trend from 1.3063. In such case, focus will be turned back to 0.9406 low in near term.

In the longer term picture, there is no clear indication that the long term down trend from 2002 high of 1.6196 has reversed even though bullish convergence condition was seen in monthly MACD. The fall from 1.3063 to 0.9406 looks corrective and could either be part of a sideway pattern from 0.9056, or a corrective to rise from there. The long term outlook, i.e., the possibility of taking out 1.3063 high, will depend on whether rise from 0.9406 would eventually develop into a strong impulsive wave. We'll wait and see.

EUR/GBP Weekly Outlook

EUR/GBP rose further to 0.8786 last week but lost momentum ahead of 0.8795 resistance. Initial bias remains neutral this week and some sideway trading could be seen first. Note that while another rise cannot be ruled out, we'd maintain that outlook will remain bearish as long as 0.8795 resistance holds and the whole decline from 0.9083 is still in favor to continue lower. Below 0.8687 minor support will flip bias back to the downside for retesting 0.8529 first. Nevertheless, break of 0.8795 will dampen the bearish view and turn focus back to 0.8884 key near term resistance.

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. Second leg should also be finished at 0.9083. Fall from 0.9083 is treated as the third leg and should target 0.8067 first and possibly further to 61.8% projection of 0.9799 to 0.8067 from 0.9083 at 0.8013 (which is closes to 0.8 psychological level). Nevertheless, we'd expect strong support from 0.7693/8186 support zone to contain downside to finish off the consolidation. On the upside, break of 0.8884 resistance is needed to invalidate this view or we'll stay bearish now.

In the long term picture, long term up trend from 2000 low of 0.5680 shouldn't be over yet and the choppy fall from 2008 high of 0.9799 should be a correction only. We'd expect such correction to be contained by 0.7963/0.8186 support zone and bring up trend resumption. Rise from 0.5680 is still expected to extend beyond 0.9799 high eventually

USDCAD - Very Cautiously Bullish above 1.0133

In line with yesterday's bearish outlook for sentiment, Tuesday’s limited rally was entirely overturned by fresh selling interest. Steady losses throughout the day took USDCAD to the most bearish levels traded for three weeks. The speed and scope of this decline also took the currency pair to oversold intraday extremes and overnight trading has seen the market attempt to correct that situation. This rally is likely to be temporary but it does leave the immediate bias positive. In view of this our call is Very Cautiously Bullish above 1.0133 The immediate objective is 1.0208, the overnight high, with a move beyond that point targeting 1.0239, half of yesterday's net fall, or even towards  1.0281.
Selling through 1.0133, yesterday's low,, is the risk to this call as it signals that selling pressure is greater than currently assessed. The market should then decline to 1.0108 then towards 1.0035.

Daily Report: Risk Appetite Continues on European Optimism, But Losing Momentum

Risk appetite continued on optimism on European bank recapitalization plan. European Commission president Jose Manuel Barroso presented a "comprehensive package" yesterday and urged immediate actions from European policymakers to resolve the current crisis. The recommendations include "decisive action" on Greece including the next tranche of bailout fund and a second "adjustment program" with private sector involvement. Banks should be strengthened "urgently" as sovereign contagion and banks are now "linked". Barroso also called for another assessment of the banking system and "fast track" policies of enhancing stability and recovery in Europe. Finally, Barroso said European Union should complete the "monetary union with a real economic union". Also, markets are also hopeful that Slovakia will finally become the last country in Eurozone to approve the EFSF expansion today or tomorrow. The opposition party made an agreement with parties in departing the Slovak coalition that they'll vote to pass through the EFSF expansion in exchange for early elections in March.

Some new information was delivered in the September FOMC minutes published overnight. First, most policymakers lowered their forecasts for the rest of 2011 and 2012. Yet, recession is not their concerns. Second, most members saw advantages in improving communication regarding the goals for inflation and unemployment. However, there were concerns about a proper mechanism to avoid misunderstanding. Moreover, 3 policy options for managing the size and composition of the System Open Market Account (SOMA) were discussed during the meeting: a reinvestment maturity extension program, a SOMA portfolio maturity extension program, and a large-scale asset purchase program. While the second option, known as operation twist, has been chosen, 2 members favored stronger action while 3 members dissented to take additional accommodation'.

On the data front, New Zealand business manufacturing index dropped to 50.8 in September. Japan Tertiary industry index dropped -0.2% mom in August. China trade surplus narrowed to USD 14.5b in September. Australian job market expanded more than expected by 20.4k in September while unemployment rate dropped to 5.2%. Swiss PPI, UK trade balance, Canada trade balance, US trade balance and jobless claims will be released later today.

While risk appetite extends further this week, note that DOW is starting to lose some momentum ahead of 11716/11862 resistance zone. We'd be cautious on reversal signal with focus on 11261 minor support. Break of which will at least trigger a pull back, with prospect of near term reversal for a test on recent low at 10400. Dollar index 

AUD/USD Daily Outlook

Daily Pivots: (S1) 0.9945; (P) 1.0076; (R1) 1.0286; 

AUD/USD rises further to as high as 1.0232 so far today and intraday bias remains on the upside for near term channel resistance (now at 1.0412). Sustained break there will pave the way for 1.0764 resistance and above in near term. On the downside, below 1.0104 minor support will turn bias neutral and bring consolidations. But another rise will remain in favor as long as 0.9865 support holds. However, break of 0.9865 will suggest that rebound from 0.9387 has completed and will bring retest of this support.

In the bigger picture, focus remains on 0.9404 key support level. As long as this support holds, price actions from 1.1079 is treated as a correction, or part of a consolidation pattern to the up trend from 0.6008 only. And, in such case, AUD/USD should still made another high above 1.1079 before forming an important top. However, sustained break of 0.9404 will indicate that rise from 0.6008 is already finished and would possibly bring deeper fall towards 61.8% retracement of 0.6006 to 1.1079 at 0.7945.