Australian Dollar Remains Supported By Interest Rate Expectations

The Australian dollar set a fresh yearly high of 0.8778 against the greenback during the past week before the release of the RBA minutes tempered interest rate expectations. Policy makers stated that “members were conscious of the need to balance the task of controlling inflation over the medium term with that of supporting economic recovery.”

Australian Dollar Remains Supported By Interest Rate Expectations

Fundamental Outlook for Australian Dollar: Bullish

-    Second quarter dwelling starts unexpectedly fall by 3.7%.

-    RBA Minutes Temper Tightening Expectations

-    The Westpac Leading Index rose by 1.1%, to its highest level in seven months

The Australian dollar set a fresh yearly high of 0.8778 against the greenback during the past week before the release of the RBA minutes tempered interest rate expectations. Policy makers stated that “members were conscious of the need to balance the task of controlling inflation over the medium term with that of supporting economic recovery.” The central bank is widely expected to be the first of the major economies to begin tightening making the already high yielder more attractive in the current environment of risk appetite. Indeed, the Australian economy emerged from the recent downturn with the least amount of scars and is poised to take advantage of global growth and the ensuing demand for raw materials. The Westpac leading index which is a gauge that attempts to forecast the economy’s performance over the next three to nine months rose by 1.1% to its highest level in seven months. Looking at the breakdown we see the bullish outlook is derived from expected positive contributions from real money supply and dwelling approvals which would suffer if the central bank started to cut rates. Furthermore, the second quarter dwelling starts report showed an unexpected decline of 3.7% against economists forecast of a 2.0% gain. It would mark the fourth straight quarterly decline and a clear signal that higher interest rates could start to increase downside risks.

Nevertheless, the central bank stated that the Australian financial system remains strong and that the country is benefitting from exposure to China and the global economy on a sustained growth path. However, Governor Stevens recognized that there are still some warnings signs such as weak business credit conditions. Therefore, we may see policy makers reluctant to take any actions that may deter lending following the recent credit crisis until inflation risks become obvious. Markets are still pricing in 174 bps of rate hikes over the next twelve months which should keep the Aussie well supported. Yet, we have seen it slip from a high of 199 bps on September 7th, which may signal some near-term weakness for the currency. The DEWR skilled vacancies report is due for release and softness in the labor market could give traders an excuse to take profits, but another sign of growth could add to bullish momentum. The RBA financial stability review and quarterly wage agreements are also on the horizon and could potentially impact price action. However, traders should take their cues from commodity markets and risk trends as they continue to be the dominant drivers of price action for the pair. The next level of resistance may be found at 0.8816-the 8/22/08 high where we could see the current rally stall. Conversely, we could see the pair retrace back to the 20-Day SMA at 0.8513 before another push higher. -

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Canadian Dollar Risks Decline on Crude Oil Price Pullback

Fundamental Forecast for Canadian Dollar: Bearish

-    Canadian Dollar continues driven by Oil Prices

-    Loonie rallies for 3 consecutive days

-    Yet late-week tumble shows CAD unable to hold gains

The Canadian Dollar finished the week modestly higher against its US namesake, but the currency’s inability to close near year-to-date highs leaves short-term momentum to the downside leading into the coming weeks’ trade. The USDCAD currency pair dropped for three consecutive trading days and briefly breached the psychologically significant C$1.0600 mark. Yet it serves to note that oil prices likewise failed to hold near fresh highs, and there is clear risk for near-term pullback. Domestic economic data proved largely better than expected but had relatively little influence on price. Instead, the USDCAD continues to track Crude Oil prices and broader risk market sentiment. Continued strength in financial market risk barometers would bode well for the Canadian Dollar, but the threat of near-term reversal looms large for the recently high-flying currency.

The Canadian Dollar has ridden the wave of renewed optimism across financial markets, rising in tandem with similarly buoyant Crude Oil prices. Yet Crude Oil itself remains stuck in a consolidative range, and its inability to break higher on several successive attempts leaves clear risk of near-term pullback. A relatively quiet week of Canadian economic event risk suggests that the domestic currency will trade almost-solely on developments in other markets. Potential exceptions include early-week International Securities Transactions and Canadian Retail Sales reports. The former is expected to show that foreigners invested a net C$9.5 Billion into Canadian Securities in July. Said number would represent a modest pullback from impressive May and June results, but an at-consensus print would nonetheless underline solid foreign demand for Canadian securities. The subsequent Retail Sales release is likewise expected to show robust consumer demand, but a recently impressive Wholesale Sales result means that only the most surprising of outcomes will elicit strong reactions out of the USDCAD.

Canadian Dollar traders should keep a close eye on developments in global financial markets—especially commodity prices and Crude Oil futures. If any of these key asset classes break their recent price ranges, the Canadian Dollar may follow suit.

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Dubai builds, but they don’t come

There is something surreal about the financial crisis that has engulfed Dubai. A small desert emirate, without significant hydrocarbon reserves, Dubai finds itself geared to the eyebrows in the midst of a global downturn. Deutsche Bank estimates its external debts at about $74.3 billion. That, for the record, is 107 percent of the emirate’s expected 2009 GDP, or more than 14 times its government revenues for 2006 (the latest year for which data is available). But it isn’t just the extreme leverage that is surreal. Dubai has long borrowed heavily to invest. The real twist comes from the wacky way that Dubai has chosen to invest its borrowed cash. True, not all of Dubai’s money-making schemes were foolish. The development of DP World, a ports services business, made eminent sense, given the emirate’s status as a trade hub. And this has proved reasonably successful.

 

But some of its “get rich quick” ideas were about as sound as something out of Gulliver’s Travels — the attempts of the state of Lagado to extract sunbeams from cucumbers, for instance. Into this category one might put the attempt to conjure a financial centre out of the desert, or to build luxury housing on sandbanks in the Arabian Gulf. Or, indeed, the attempt to create a sovereign wealth fund, Istithmar, without having any surpluses to inject into it in the first place. Outsiders have long marvelled at this “build it and they will come” approach. Now its shortcomings are becoming clear. Much of Dubai is half-built and they probably won’t come. Istithmar, for instance, used leverage to pursue an investment strategy built around luxury goods, retail and financial services. It is not hard to see why this has hit the rocks. Istithmar’s parent, Dubai World, is in the process of restructuring some $12 billion of the debt it has taken on.

 

Predictably, it has been forced into the expedient of trying to sell good assets to fund losses on the toxic ones. However its attempts to hawk part of its $6.6 billion stake in listed DP World to a local private equity firm have thus far proved fruitless as the two sides failed to agree on price. How the crisis pans out depends on Dubai’s willingness to stand behind the various state-controlled enterprises it has spawned. Thus far it has been willing to do so. But the calls on the emirate’s meagre finances (its government revenues were little more $5 billion in 2006) seem relentless. In December it must repay or refinance a $3.5 billion bond taken out by Nakheel, Dubai World’s property unit. And the losses from other failed ventures, such as Istithmar’s investment in high end U.S. retailer Barneys, are also mounting up.

 

Deutsche Bank reckons it will have to refinance an average of $12.5 billion in external debt between 2010 and 2013. To continue to backstop ventures that have lost significant value or may take longer than expected to generate free cashflow, Dubai may be forced to turn for assistance to its cash rich neighbour Abu Dhabi, which has already lent it $10 billion and has provisionally undertaken to provide a further $10 billion of assistance. Were this to be sought it might stabilise Dubai’s finances, but at a cost. Dubai’s ambition to be a financial hub, tourist destination and haven for the world’s super rich depended to some extent on its relatively liberal social attitudes. The more dependent the emirate becomes on its conservative neighbour for money, the harder it may be to retain that liberal tinge.

Source: Reuters

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US Dollar Overdue for a Technical Bounce, But Fundamental Reversal...

The dollar was able to relieve the pressure of suffering its worst trend on recent record by clawing out the first bullish close in eleven consecutive trading days; but that does not mean the burdened currency is necessarily primed for a true reversal. While this currency is arguably oversold on a fundamental basis; the same drivers that ushered it to its yearly low last week are still in play.

US Dollar Overdue for a Technical Bounce, But Fundamental Reversal…

Fundamental Outlook for US Dollar: Neutral

-    Speculation for rate hikes deferred as fundamentals temper exuberant risk appetite

-    The steady charge in risk appetite keeps the dollar on the short side of carry interests

-    Sentiment can often run askew of fundamentals; but what do technicals say about the dollar?

The dollar was able to relieve the pressure of suffering its worst trend on recent record by clawing out the first bullish close in eleven consecutive trading days; but that does not mean the burdened currency is necessarily primed for a true reversal. While this currency is arguably oversold on a fundamental basis; the same drivers that ushered it to its yearly low last week are still in play. The pace of the economic recovery, growing financial concerns and a Fed struggling to keep pace are all prominent concerns when gauging the long-term health of the dollar; but all of that is overshadowed by the immediate and market-wide preoccupation of risk appetite.

Last week, a Bloomberg survey of investors found the market was the most bearish on the dollar in 18 months. Where does this speculative grade come from? The economy is still dealing with an economic recovery and government deficits are a genuine concern; but most of the world’s largest economies are suffering with the same dilemma. The real weight on the dollar is the steady revival of risk appetite over the past six months. Following the necessary period of consolidation after the worst of the financial crisis, capital started to slowly work its way back into the speculative arena. Initially, interest was from early adopters; but the draw of capital gains was strong enough to start the flow from deeper pools of wealth in “risk free” areas. Where do these funds go? It certainly finds its way to US equities and other relatively-risky assets; but when it comes to the yield bearing instruments, the American products can’t compete. The benchmark, 3-month Libor rate dropped to a new record low (0.28948 percent) this past week and subsequently was depreciated to a discount against its Japanese (0.34875 percent) and Swiss (0.29667 percent) counterparts. Does the dollar realistically make the ideal funding currency? No. The Fed will certainly turn to a hawkish policy stance well before the other two, it has the potential to take a more consistent hawkish path, deficits are a problem amongst all three and the foundation for a true recovery is most stable in the US. As soon as US rates recover, risk-seeking capital will once again flow into the world’s financial center.

In the meantime, we may see a shift in sentiment that could benefit the dollar’s safe haven status. The broader markets have rallied consistently for months – despite a fundamental picture that has changed pace little since the initial reversal. Naturally, a wave of profit taking is highly probable. And, considering the advance to this point has been heavily dependent on steady capital gains, a correction could be sharp and aggressive. There are many different potential catalysts for such a turn; but in the end, the shift in optimism will likely develop naturally. Nonetheless, we should keep an eye on a few specific developments. Reports suggest that lending to consumers has dropped at its fastest pace since the Great Depression; yet leverage has returned to levels last seen since before the 2007 meltdown. This is an imbalance that will lead to problems later down the line if not corrected. Also, the Federal Reserve and White House have both voiced concern over the commercial real estate debt market. The former is looking into major banks’ exposure to this asset class; but the term ‘stress test’ is not being used.

Though it is vital to keep abreast of the health of risk appetite; we shouldn’t ignore the influences of data and growth forecasts. The economic docket is light next week; but durable goods orders and housing data (existing sales, new home sales) can supply short-term volatility. It is the FOMC that tops the list – not with a possible change in the benchmark, but commentary that can move up the time table for a hike. Data aside, the US/China trade spat hints at a growing concern with protectionism which may come under scrutiny at the September 24/25 G20 Meeting. Exit strategies, financial regulation, banking compensation are all on the topic list; but not currencies.

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Euro: Not as Strong as the EURUSD's Trend Suggests

Is the euro the fundamental powerhouse that the EURUSD would suggest or is the euro merely playing the compliment to the rest of the market. If we were to look at the world’s most liquid currency pair alone, we see a six month trend, recent rally and the highest overall level for the exchange rate in nearly a year. However, the easy read on the major is clouded when we look at the crosses.

Euro: Not as Strong as the EURUSD’s Trend Suggests

Fundamental Forecast for Euro: Neutral

-    Investor confidence hits its highest level since April 2006 as growth, equities recover
-    Slow global recovery translates into the biggest trade surplus for the Euro Zone in seven years
-    Has a push above December’s highs cleared the way for a EURUSD extension rally?

Is the euro the fundamental powerhouse that the EURUSD would suggest or is the euro merely playing the compliment to the rest of the market. If we were to look at the world’s most liquid currency pair alone, we see a six month trend, recent rally and the highest overall level for the exchange rate in nearly a year. However, the easy read on the major is clouded when we look at the crosses. Against the pound, the euro was set in its biggest rally since March (a move that was mirrored in most of those pairs denominated in sterling). Elsewhere, EURJPY was stuck in a contracting range; EURCHF was virtually unchanged in its 100-point range; and the commodity group consolidated within bigger trends. It seems the case that the market is influencing the euro rather than the euro influencing the market. And, while there are fundamental concerns building beneath the surface, this relationship isn’t likely to change much in the coming week.

Few would argue that risk appetite (and its influence in currencies through carry interest) is a primary driver for the market at large; but what does that mean for the euro? To gauge any currency or asset’s response to sentiment, you need to determine where it stands in the scale of risk. High interest rates, strong growth prospects and progressive policy are a few factors that build a positive correlation to a rising demand for yield. Naturally, the opposite considerations count as traits for a safe haven or funding currency. On either side of this spectrum, we have an asset that is sensitive to the underlying fundamental currency. However, the euro fits comfortably in the middle of the range. The benchmark lending rate in the Euro Zone is relatively high; but the outlook for hawkish progress is reserved. Growth is colored not only by the positive turn from Germany and France; but there have also been downgrades for Italy and Spain. Overall, despite the confidence of politicians and some policy officials, the economy is on the same playing field as the US, Japan and many others. Until the ECB turns up the heat on the target rate or financial troubles (like the ability for some Eastern European economies to repay their debt), this will remain the case.

Outside the vagaries of sentiment, there are a few notable economic events on the docket to supply short-term volatility and perhaps a moderate shift on the bearing for growth forecasts. Top event risk is the series of service and manufacturing sector PMI data. While this series covers specifically the business sector of growth, it is inclusive and timely enough to act as a meaningful leader for growth speculation. Being the September round of data (the ‘Advanced’ or first measure), this will round out the forecast for third quarter activity. All of the regional, German and French numbers are expected to produce month-over-month improvement and most are seen offering ‘expansionary’ readings. This would support the central banks and government’s outlook for growth; but it still does not paint a clear picture for a return to a true expansionary trend.

Other indicators like the Euro Zone industrial new orders and German factory inflation gauge threaten little more than a meager shift; but the IFO business sentiment gauge could generate some fundamental interest. Sensitive to economic health, consumer spending, access to credit, export demand, optimism among German firms acts as its own unique report on the general health of the economy. The headline and expectations readings have been most prized recently; but a closer eye should be kept on the difference between expectations and current conditions. The outlook after a financial crisis and steep recession will certainly improve quickly; but actual health in the economy and markets will be more measured. One will have to give way to the other sooner or later.

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Japanese Yen Forecast Bullish on Lack of Intervention Threat

Fundamental Forecast for Japanese Yen: Bullish

- What happens to the Japanese Yen when threat of intervention is removed?
- Yen tumbles as S&P 500 continues to set fresh highs
- ‘September effect’ not having much of an effect on Japanese Yen

The Japanese Yen finished the week lower against all but the British Pound and the US Dollar, as impressive rallies in the US S&P 500 and broader financial market risk sentiment pushed the safe-haven currency sharply lower against major counterparts. A mediocre week of economic data hardly helped matters, and hawkish rhetoric from the Ministry of Finance pushed the Yen even lower. Vice Finance Minister Yasutake Tango stated that the administration was watching currency moves closely—implying that forex market intervention was a distinct possibility. Indeed, the Japanese Ministry of Finance has historically been an active participant in the Japanese Yen exchange rate and has repeatedly intervened in instances of excessive Yen strength. The very fact that the US Dollar/Japanese Yen exchange rate reached the psychologically significant 90 mark was enough reason to fear MoF intervention, and Tango’s comments were enough to fuel a rapid USDJPY pullback. Later commentary from newly-appointed Finance Minister Hirohisa Fujii quickly dispelled the short-term threat to JPY stability, but the damage had been done and the Japanese Yen remained on offer through the week’s close.

The legitimate threat of MoF FX intervention served as a clear warning to JPY bulls, but recent rhetoric suggests that there will be little in the way of further Yen strength. This leaves the currency to trade purely off of financial market risk sentiment. The fact that the S&P 500 recently registered fresh 2009 highs hardly bodes well for the risk-linked currency, but no market can rally indefinitely. Given the overwhelmingly bearish trend in the USDJPY (bullish trend for the JPY), it seems momentum is plainly in the Yen’s favor. Yet it remains critical to watch any and all moves in key financial market risk barometers.

We previously claimed that the “September Effect” could lead the S&P 500 lower and the Japanese Yen higher. Recent weeks have produced impressive equity market strength yet the JPY has remained relatively stable. We believe that the Yen stands to gain on any subsequent pullbacks in stocks, and recent experience shows that it can hold its own despite major S&P strength. Thus we would argue that risks remain fairly bullish for the Yen. If stocks continue their seemingly interminable rally, the JPY could pull back slightly. If stocks fall, the Yen will in all likelihood continue its previous ascent. Things are never quite this simple in currency markets, but we believe JPY risks favor near-term rallies.

The wild card will come on Wednesday’s Trade Balance report. The export-dependent Japanese economy has taken a massive hit on the sharp drop in foreign demand for its own production. Any signs of continued exporter duress will once again raise political pressure on the Ministry of Finance to counteract Japanese Yen strength. Though we clearly believe that risks of intervention are remote, a truly shocking trade balance result could rekindle market speculation on MoF intervention.

The coming week may prove significant in determining more medium-term direction in the Yen. If nothing else, markets will definitely watch for signs that the USDJPY may finally break below the psychologically significant 90 mark. –

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British Pound Decline May Be Indicative of Long-Term UK Macro Outlook

British Pound Decline May Be Indicative of Long-Term UK Macro Outlook

The British pound was easily the weakest of the majors last week as the currency fell more than 3 percent against the euro, Swiss franc, and Canadian dollar. Likewise, the British pound slumped 2.4 percent against the US dollar and 1.7 percent versus the Japanese yen. While some indicators from the nation have shown signs of improvement, such as the RICS house price index, fiscal data has done nothing but deteriorate, adding pressure on the British pound. In fact, public sector net borrowing in the UK jumped a whopping 16.1 billion pounds during August as income tax receipts fell 13 percent from a year ago. Even worse, the deficit reached 127 billion pounds in August from a year ago, and the steady rise suggests that the shortfall may breach Chancellor of the Exchequer Alistair Darling’s full-year forecasts for a deficit of 175 billion pounds.

British Pound Decline May Be Indicative of Long-Term UK Macro Outlook

Fundamental Forecast for British Pound: Bearish

- UK RICS house prices rise for first time in 2 years
- The number of people looking for jobs in the UK rose the highest level since 1995
- FXCM SSI results suggest GBPUSD could be in for further declines

The British pound was easily the weakest of the majors last week as the currency fell more than 3 percent against the euro, Swiss franc, and Canadian dollar. Likewise, the British pound slumped 2.4 percent against the US dollar and 1.7 percent versus the Japanese yen. While some indicators from the nation have shown signs of improvement, such as the RICS house price index, fiscal data has done nothing but deteriorate, adding pressure on the British pound. In fact, public sector net borrowing in the UK jumped a whopping 16.1 billion pounds during August as income tax receipts fell 13 percent from a year ago. Even worse, the deficit reached 127 billion pounds in August from a year ago, and the steady rise suggests that the shortfall may breach Chancellor of the Exchequer Alistair Darling’s full-year forecasts for a deficit of 175 billion pounds.

According to the Financial Times, the corrosion of the UK’s fiscal state has “been a result more of a collapse in revenues - total tax receipts have fallen by 11.4 percent so far this financial year compared with a year earlier - than of a jump in spending” of just 5.3 percent this year. Going forward, the further the UK’s fiscal state deteriorates, the greater the risk will grow that ratings agencies will question if the nation deserves the golden AAA credit rating, especially after Standard & Poor’s downgraded the UK’s credit outlook to “negative” from “stable” because of their budget woes back in May. Nevertheless, Standard & Poor’s has also said that they would reserve any judgment on potential downgrades until the next general election, which may be held in May or early-June 2010. On the downside, this leaves a long period of time open for speculation on the prospects for the UK’s credit rating to reign supreme, which may make the already-volatile British pound even choppier.

In more immediate event risk, the minutes from the BOE’s September meeting will be released on Wednesday at 8:30 ET. However, they may not expose new information as the BOE’s Quarterly Inflation Report has already revealed dour outlooks by the Monetary Policy Committee. That said, following the latest UK CPI results, which were stronger than anticipated, Credit Suisse overnight index swaps have shifted to price in 78 basis points worth of hikes by the BOE over the next 12 months, up from 66.7 basis points on Tuesday. As a result, if the minutes highlight a clearly dovish bias by the BOE, the market's focus may shift back toward the central bank's liberal stance on quantitative easing, and the British pound could fall sharply. –

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Swiss Franc Trading Hinges on Yield Outlook, Risk Sentiment

Swiss Franc Trading Hinges on Yield Outlook, Risk Sentiment

Fundamental Forecast for Swiss Franc: Neutral

- Swiss Producer Prices Rebound From Record Low in August
- Industrial Production Set Fresh Record Low in Second Quarter
- Annual Retail Sales Outperform Expectations, Grow 1% in July
- SNB Keeps Rates Unchanged, Upgrades Inflation Forecast

The standby counter-question to anyone seeking to forecast the direction of the Swiss Franc in recent months has been “against what?” In trade-weighted terms, the currency has been confined to a narrow range since March, when the Swiss National Bank intervened into the markets to drive down the exchange rate and pledged to keep a lid on further appreciation as a bulwark against deflation (a stronger currency boosts purchasing power, effectively reducing prices). Markets in the Euro Zone account for close to 60% of Swiss export demand, so in practical terms, reining in the Franc in trade-weighted terms has essentially meant controlling the EURCHF rate (which the SNB has openly discussed). Elsewhere, the Swissie has slipped against the commodity currencies and the Pound but has managed to advance against the US Dollar and the Yen. This is a reflection of the interest rate environment. The Australian and New Zealand Dollars, where 3-month Libor rates have stayed steadily above those of the Franc, have outperformed. The Pound and the Canadian Dollar have seen fewer gains because, while still in their favor, the yield gap has narrowed considerably since the beginning of the year. Finally, the Yen sold off as a rapidly shrinking rate spread erased any advantage the otherwise markedly cheaper Japanese unit had over the Franc, while the US Dollar fared worst of all as its 3-month Libor tumbled to sink below that which is paid on the Swiss currency.

What does this mean for the week ahead? If carry flows are the primary catalyst behind recent price action, currency traders ought to have their eye on the trajectory of risk sentiment, meaning global stock and commodity prices. We have long argued that the markets have done too, much too fast since risky assets began to rally in March with global equities trading at levels unseen since 2003 relative to earnings. The world economy grew nearly 3% in real terms that year, whereas virtually every credible forecast calls for the first post-WWII contraction in real growth in 2009, pointing to lackluster revenues and overextended asset prices. Further, trading volumes have steadily declined for the bulk of the equity rally (the past 5 out of 6 months). While some of this may be chalked up to a seasonal slowdown that is typical for the summer, it may also be hinting at waning conviction behind the up move and a forthcoming reversal as traders return from holiday and volumes pick up into the Fall. While timing this reversal has proven elusive, we can say that when it does occur, the accompanying liquidation in carry trade positions will likely push the Franc higher against the Antipodeans and (to a lesser extent) the Pound and the Canadian Dollar. Meanwhile, a surge in demand for safety will likely boost the US Dollar as well as the Japanese Yen, eroding the Franc’s recent gains against those currencies.

Turning to the economic calendar, the August trade balance report will be of interest: exports look set to decline considering last week’s dismal industrial production data, but the appetite for imported goods is proving difficult to gauge. Indeed, domestic demand may have recovered a bit considering the recent moderation in retail sales figures, but the trend in receipts is undeniably pointing lower while unemployment rises and consumer confidence continues to set record lows. The release of updated economic forecasts from the government’s State Secretariat for Economic Affairs (SECO) will be notable in terms of how it compares to last week’s upward revisions to the growth and inflation outlook of the SNB

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Daily Report: Dollar Weakness Continues, BoJ on Hold, SNB Next

Dollar's fall continues today as trends in the overall financial markets extend. Following 1.12% rally in DOW, Asian stocks are broadly higher. Nikkei drew further support from medium term trend line and rebounds 1.68% today. Gold's rally is still in progress and reaches as high as 1025.8 so far while crude oil extends the rebound to 72.70. Dollar index is now pressing 76 level. Among the major currencies, Aussie, Canadian and Euro are the strongest against the greenback and the up trend in theses currencies are still in favor to continue in near term. On the other hand, Sterling remains generally the weakest major currency.

BoJ left overnight lending rate at 0.1% on unanimous vote as widely expected. The asset-buying program and emergency lending program to banks and corporations are also kept unchanged. In the accompanying statement, BoJ upgraded assessment of the economy from "stopped worsening" to "showing signs of recovery" and called for growth to begin in second half of 2009 fiscal year. The bank cited a rebound in exports and public spending as underpinning a recovery, but pointed to weak consumer spending and surging unemployment as risks.

Swiss National Bank announcement is the main focus today. SNB is is expected to leave the three-month Libor target unchanged at 0.25% at today's quarterly meeting. Rates are indeed expected to be held steady for the rest of the year as well as most part of 2010 to help sustain recovery as the Swiss government exit from its fiscal stimulus. The main focus is needed on any change in the currency policy. The bank has been buying currency on an ad hoc basis to weaken the Swiss Franc and ease threat of imported deflation. The bank is keen to prevent a protracted period of deflation and will likely remain on guard to intervene in the currency market if the franc starts to strengthen.

On the data front, UK retail sales is expected rise modestly by 0.1% mom in August. Eurozone trade surplus is expected to widen slightly to EUR 1.2B in July. Canadian CPI is expected to show 0.2% mom rise, -0.6% yoy fall in August. US housing s starts and building permits are expected to improve mildly in August. Philly Fed index is expected to rise further to 7.8 in September.

Dollar index's decline continues and extends further to as low as 76.03 so far. Intraday bias remains on the downside and further decline should be seen to 75.89 key support. We're still anticipating strong support from this level to conclude recent down trend. But a break of 76.57 resistance is needed to be first sign of stabilization. Otherwise, further decline is still in favor.

AUD/USD Daily Outlook

Daily Pivots: (S1) 0.8655; (P) 0.8702; (R1) 0.8780; More

AUD/USD's rally is still in progress and reaches as high as 0.8768 so far today. Intraday bias remains on the upside and further rise should be seen to 61.8% projection of 0.6284 to 0.8262 from 0.7702 at 0.8924 next. On the downside, though, below 0.8679 minor support will turn intraday outlook neutral and bring consolidation. But downside should be contained by 0.8543 support and bring rally resumption.

In the bigger picture, AUD/USD is trading above medium term rising trend line (0.6284, 0.7702) and thus, rise from 0.6282, and that from 0.6008, is still in progress. The strength of the rise from 0.6008 and the firm break of 0.8519 resistance argue that AUD/USD is developing into another up trend. In other words, long term correction from 0.9849 has possibly completed at 0.6008 already, after being support slightly above 76.4% retracement of 0.4773 (01 low) to 0.9849 (08 high). Having said that, the current rally from 0.6008 might extend further to retest 0.9849 high next.

On the downside, below 0.8239 support will have the medium term rising trend line firmly broken and thus argue that a medium term top is formed. Some deep pull back and lengthy consolidation might then be seen, with prospect of fall to 0.7267/7702 support zone. But a break of 0.7267 resistance turned support is needed to indicate that whole rise from 0.6008 has completed. Otherwise, we'll continue to favor the longer term bullish case even in case of deep correction.

Economic Indicators Update

GMT	Ccy	Events	Actual	Consensus	Previous	Revised
23:50	JPY	BSI Manufacturing index Q/Q Q3	15.5	-11.4	-13.2
23:50	JPY	Tertiary Industry Index M/M Jul	0.60%	0.60%	0.10%	0.20%
3:30	JPY	BoJ Interest Rate Decision	0.10%	0.10%	0.10%
8:30	GBP	Retail Sales M/M Aug		0.10%	0.40%
8:30	GBP	Retail Sales Y/Y Aug		2.70%	3.30%
9:00	EUR	Eurozone Trade Balance (EUR) Jul		1.2B	1.0B
10:00	GBP	U.K. CBI Industrial Orders Sep		-49	-54
11:00	CAD	CPI M/M Aug		0.20%	-0.30%
11:00	CAD	CPI Y/Y Aug		-0.60%	-0.90%
11:00	CAD	BoC CPI Core M/M Aug		0.10%	0.00%
11:00	CAD	BoC CPI Core Y/Y Aug		1.60%	1.80%
12:00	CHF	SNB Interest Rate Decision		0.25%	0.25%
12:30	CAD	Leading Indicators M/M Aug		--	0.40%
12:30	USD	Housing Starts Aug		595K	581K
12:30	USD	Building Permits Aug		580K	560K
12:30	USD	Initial Jobless Claims (SEP 12)		558K	550K
14:00	USD	Philadelphia Fed. Survey Sep		7.8	4.2

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Weekly Review and Outlook: Sterling Sold Off, Dollar Losing Downside Momentum

Weekly Review and Outlook

Sterling Sold Off, Dollar Losing Downside Momentum

Top 5	Current	Last	Change (Pips)	Change (%)
GBPCHF	1.6751	1.7301	-550	-3.28%
EURGBP	0.9038	0.8746	+292	+3.23%
GBPCAD	1.7388	1.7936	-548	-3.15%
GBPAUD	1.8753	1.9295	-542	-2.89%
GBPUSD	1.6267	1.6658	-391	-2.40%
Dollar
EURUSD	1.4707	1.4570	+137	+0.93%
USDJPY	91.35	90.70	+65	+0.71%
GBPUSD	1.6267	1.6658	-391	-2.40%
USDCHF	1.0297	1.0382	-85	-0.83%
USDCAD	1.0689	1.0765	-76	-0.71%
Euro
EURUSD	1.4707	1.4570	+137	+0.93%
EURGBP	0.9038	0.8746	+292	+3.23%
EURCHF	1.5146	1.5129	+17	+0.11%
EURJPY	134.36	132.16	+220	+1.64%
EURCAD	1.5720	1.5682	+38	+0.24%
Yen
USDJPY	91.35	90.70	+65	+0.71%
EURJPY	134.36	132.16	+220	+1.64%
GBPJPY	148.60	151.14	-254	-1.71%
AUDJPY	79.18	78.29	+89	+1.12%
NZDJPY	64.75	64.14	+61	+0.94%
Sterling
GBPUSD	1.6267	1.6658	-391	-2.40%
EURGBP	0.9038	0.8746	+292	+3.23%
GBPCHF	1.6751	1.7301	-550	-3.28%
GBPJPY	148.60	151.14	-254	-1.71%
GBPCAD	1.7388	1.7936	-548	-3.15%

Sterling was hit hard last week by comments from BoE Governor King that the central bank is considering to cut despite rate paid to financial institutions as well as renewed concern on the banking sector in UK. Indeed, the pound dropped over -3% against Euro, Swissy and Canadian dollar and closed lower even against the weak dollar and yen. Further strength in gold and rebound in crude oil sent dollar lower. Rally in global stocks also as some pressure to the greenback and Japanese yen. Nevertheless, note that dollar is approaching key support level and downside momentum is seen diminishing. Also, Gold's rally is possibly losing steam ahead of 1033.9 key resistance and Monday will see markets' reaction to IMF's announcement to sell 403.3 metric tons of Gold. A rebound in the greenback could be around the corner.

At the Treasury Select Committee hearing on September 15, the BOE Governor Mervyn King said the MPC is considering lowering the remuneration on banks' reserve. The issue was actually not new as King mentioned about it at the August Inflation report but the BOE did not announce any action at September's meeting. The Governor brought the issue out again may suggest something will be done in coming months and this triggered selloff in sterling. Cable plunged below the 1.65 support before finding support around 1.6425 while EURGBP broke above recent trading range in 0.884 and rose to 0.89. In this article, we will talk about how a change in remuneration rate works and its impact on QE. More in BOE May Reduce Deposit Rate. How Does it Work and What are the Impacts?

SNB decided to leave the 3-month LIBOR target unchanged at 0.25%. However, the central bank has turned slightly more optimistic about the economy and raised its outlook on GDP and inflation. The SNB also said it would continue to 'to act decisively to prevent any strengthening in the Swiss franc against the euro' and to buy Swiss franc bonds if needed. More in SNB Leaves Policy Rate Unchanged but will Continue on Currency Intervention

BoJ left overnight lending rate at 0.1% on unanimous vote as widely expected. The asset-buying program and emergency lending program to banks and corporations are also kept unchanged. In the accompanying statement, BoJ upgraded assessment of the economy from "stopped worsening" to "showing signs of recovery" and called for growth to begin in second half of 2009 fiscal year. The central bank cited a rebound in exports and public spending as underpinning a recovery, but pointed to weak consumer spending and surging unemployment as risks.

On the data front, US retail sales came in much stronger than expected by rising 2.7% with ex-auto sales also rose strongly by 1.1%. Empire state manufacturing index rose to two year high of 18.9 in September and beat expectation of 14. Philly Fed survey also improved remarkably to 14.1 in September, highest since July 2007. Industrial production rose slightly more than expected by 0.8% in August. On inflation, CPI rose more than expected by 0.4% mom in August with yoy climbed to -1.5%. COre CPI rose 0.1% mom, 1.4% yoy. PPI rose 1.7% mom in August with core PPI up 0.2% mom. Housing data was solid with NAHB sentiment rose to 19 in September. TIC capital flow dropped sharply to 15.3B in July. Housing starts and building permits also improved to 598k and 579k annualized rate in August.

Germany ZEW investor confidence rose to three year high of 57.7 in September but fell short of expectation of 59.9. On the other hand, Eurozone ZEW rose much more than expected to 59.6. Eurozone CPI rose 0.3% mom, in August and dropped -0.2% yoy. Eurozone industrial production dropped -0.3% mom, -15.9% yoy in July.

UK CPI rose more than expected by 0.4% mom, 1.6% yoy in August with core CPI rising 1.8% yoy. Unemployment rate climbed to 7.9% in July, highest since 1995. Retail sales missed expected and was flat in August. RICS house price balance came in much better than expected at 10.7%, provided further evidence that housing market in UK was improving. But markets are still worry of resumption of the housing market slump next year as squeeze on mortgage lending persists.

Swiss combined PPI rose 0.1% mom dropped -5.5% yoy in August, inline with expectation. Retail sales rose 1.0% yoy in July. Canadian CPI was unexpectedly flat mom in August comparing to consensus of 0.2% rise. Leading indicates rose 1.1% mom in August. New Zealand retail sales unexpectedly dropped -0.5% mom in July.

Looking at the intermarket relationship, Gold's development will continue to be a determining factor to that of dollar. International Monetary Fund, the world’s third-largest holder of gold reserves, announced approved gold sales of 403.3 metric tons valued at about $13 billion on Sept 18. The fund said the sales would be conducted in the open market in a “phased manner” over time to avoid disrupting the market with the transactions. Markets' reactions are to be watched.

Looking at the chart, Gold is clearly losing upside momentum ahead of 1033.9 key resistance, as seen in bearish divergence conditions in 4 hours MACD. While another rise might still be seen, it looks like 1033.9 will hold initially and a pull back should around the corner for 983.2 support level. Some support should be provided to the greenback in such case. The main question is whether Gold could sustain above 983.2 on break it on the pull back. If dollar is going to stage a meaningful rebound, gold should need to break through 983.2 support and at least have a test on 900 psychological support. Otherwise, dollar's rebound could fade quickly.

Another key development to watch is that in crude oil. Conflicting signals are seen in the charts of crude oil. On the one hand, upside momentum is clearly diminishing with bearish divergence conditions in daily MACD and RSI. But still, crude oil is holding above medium term trend line support in familiar range and thus gives no confirmation of topping at 75.0 level. Ideally, we'll need to see crude oil break through 67.05 support to help confirm rebound in dollar.

Looking back at the dollar index, downside momentum is seen diminishing ahead of 75.89 key support, on bullish convergence conditions in 4 hours MACD and RSI. While another fall cannot be ruled out for the moment, we'll continue to look for further loss of downside momentum and reversal signal as dollar index hits 75.89 key support. A break of 77.24 resistance will now be an important signal that the dollar index is bottoming and will turn focus back to 78.93 resistance for confirmation.

The broader view remains unchanged that the five wave sequence from 89.62 should be near to completion and we'd expect 75.89 support to hold to at least from some sizeable rebound. We're still treating price actions from 88.46 as three wave consolidation to long term rise form 70.70 (08 low) and expect 75.89 support to hold to to conclude such consolidation and bring up trend resumption. However, note that in case of a new high in crude oil and a break of 1033.9 in gold, dollar index will inevitably power through 75.89 which will invalidate our view. Such development will open up the bearish case for a retest of 70.70 low instead.

Currency Heat Map Weekly View

	USD	EUR	JPY	GBP	CHF	CAD	AUD
USD
EUR
JPY
GBP

The Week Ahead

The Economic calendar is relatively light this week but still consists of some important events. FOMC will without a doubt leave rates unchanged. The main focus will be on any change in the language that could hint the timing of policy accommodation removal and if that happens, would shake the greenback. BoE minutes will also be another focus, in particular on any discussion on further expansion of quantitative easing as well as on deposit rate cut.

Important events and economic data to be released this week include:

• Monday: US Leading Indicators
• Tuesday: Canadian Retail Sales; US House Price Index
• Wednesday: New Zealand GDP; Eurozone PMI Manufacturing and Services; BoE Minutes; FOMC Rate Decision
• Thursday: Japan Trade Balance; German Ifo; US Existing Home Sales
• Friday: New Zealand Trade Balance; BoJ Minutes; Eurozone M3; US Durable Goods, New Home Sales

EUR/GBP Weekly Outlook

EUR/GBP rose sharply to as high as 0.9055 last week and the sustained trading above fall trend line resistance confirms our bullish view that correction from 0.9799 has completed at 0.8399 already. Initial bias remains on the upside this week and further rally should be seen to 61.8% retracement of 0.9799 to 0.8399 at 0.9264. Break there will bring retest of 0.9799 high. On the downside, below 0.8976 minor support will turn intraday outlook neutral and bring consolidation first. But pull back should be contained above 0.8837 resistance turned support and bring rally resumption.

In the bigger picture, recent development is consistent with the view that medium term correction from 0.9799 has completed with three waves down to 0.8399 already. Rise from 0.8399 is now tentatively treated as resumption of long term up trend that should send EUR/GBP through 0.9799 high eventually. We'll hold on to this bullish view as long as 0.8722 support holds.

In the long term picture, long term up trend in EUR/GBP might be resuming as correction from 0.9799 has completed at 0.8399. Decisive break of 0.9799 high will confirm this bullish view and target 61.8% projection of 0.6535 to 0.9799 from 0.8399 at 1.0416 next.

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