Humdinger of a day expected by markets Friday

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

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

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

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

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

Daily Report: Yen Shrugs off Moody's Downgrade and Rises as MOF's Measures Disappoints

The Japanese yen slipped initially early in the morning as Moody's downgraded Japan's sovereign rating for one notch to Aa3 with a stable outlook and on news MOF scheduled announcement at 2:30GMT. The rating agency blamed the Japanese government for large budget deficits and building up of debt since 2009 global recession, whilst unstable leadership hammered the effectiveness of the country's economic strategies. Moody's also indicated that Japan needs to achieve 3% of nominal GDP growth in order to get the nation's deficit problem in check, the plan of doubling the sales tax from 5% to 10% by 2015 may not be enough to solve the debt issue. However, the impact of the sovereign downgrade together with negative rating actions on most Japanese banks proved to be short-lived. Firstly, this was only a catch-up action with S&P's) and secondly, Moody's see current yen level is stressful to the Japanese economy but not dreadful. More importantly is the disappointment after the announcement of MOF Noda for new measures to dead with the yen strength. Japanese Ministry of Finance announced an emergency credit facility will be created at the amount of US$100 billion to assist Japanese firms to cope with the yen's strength. This facility will use dollar funds in the FX reserves to facilitate acquisition of foreign firms by Japanese firms. This emergency package is temporary and will last for one year. Nevertheless, as Noda did not mention anything about intervention and just talked about the government will strengthen its monitoring of the currency market for excessive speculative moves and has asked financial firms to report of their FX positions for the period to end of September, the Japanese yen rose again after the announcement. Still noted bids around 76.45/50 and further out at 76.00-10 with stops remain below 75.90 whilst on the upside, offers from exporters are lined up at 76.85-95 with some stops seen at 77.00 but sizeable stops only emerging above 77.25/30.

The greenback rebounded against other major currencies with EUR/USD slipped from day's high of 1.4442 to 1.4387, once again due to risk aversion as Asian equities are all in the red zone. Yesterday's comments from PBOC adviser Xia saying the FX reserve should be used to buy resources, energy and equities rather than euro debts, seemed still pressuring the euro. In addition, Finland Prime Minister told reporters that he would say yes if Finland could drop out of the Greek bailout plan. This also caused concerns over the effectiveness of the rescue package for eurozone debt crisis. Last in the line of negative comments on euro was former Fed chairman Alan Greenspan, who simply said that the euro is breaking down whilst U.S. is not yet in a double-dip territory. At the moment, bids are still noted at 1.4380-90 for protection of stops below 1.4370 and 1.4345/50 whilst offers from Japanese names (EUR/JPY) related are tipped at 1.4440-50 and further out at 1.4500-10 with stops placed above 1.4520 and 1.4550.

The Swissy extended yesterday's rebound on the back of active buying in EUR/CHF (jumped from yesterday's low of 1.1315 to today's high of 1.1460) and dollar's broad-based strength against European currencies. It seemed that recent actions by Swiss National Bank, including zero rates and intervening in the forward market did put a floor on the USD/CHF and EUR/CHF. More and more analysts are expecting the headline pair to retest last week's high of 0.8020 in the near term. We heard bids from model funds are located at 0.7880/85 whilst offers from European names remain at 0.7990-0.8000. With investors still hoping Fed Chairman Bernanke to announce QE3 on Friday in Jackson Hole speech, dollar's upside is likely to be limited.

Elsewhere, Asian names were seen selling aussie this morning partly due to the release of soft Conference board leading index (-0.8% vs previous -0.1%) and weaker-than-expected construction work done in Q2 (0.7% vs forecast of 1.0%). At the moment, offers are still noted from 1.0500 up to 1.0550, stops at 1.0470 were triggered but bids from real money accounts are still noted at 1.0450/55.

USD/JPY Daily Outlook

Daily Pivots: (S1) 76.43; (P) 76.68; (R1) 76.89; 

USD/JPY continues to stay inside tight range of 75.94/77.19 and intraday bias remains neutral. More consolidative trading would be seen and above 77.19 will bring another recovery. But we'll stay bearish as long as 80.23 and expect more downside ahead. Break of 75.94 will confirm decline resumption and should target 100% projection of 81.46 to 76.28 from 80.23 at 75.05 next.

In the bigger picture, USD/JPY is still staying well inside the falling channel that started back in 2007 at 124.13. There is no indication of trend reversal yet even though medium term downside momentum is diminishing with bullish convergence condition in weekly MACD. Such down trend is still in favor to continue to 70 psychological level. In any case, break of 80.23 resistance is first needed to indicate completion of fall from 85.51. Secondly, break of 85.51 is needed to be the first signal of medium term reversal. Otherwise, we'll stay cautiously bearish in the pair.