Mid-Day Report: Dollar Extends Rebound on Pullback in Crude Oil and Gold

Dollar's rebound extends in early US session on the back of further weakness in commodities. Gold takes out 1000 level and dips to as low as 996.3 while crude oil also falls through 70 level and reaches as low as 69.1 so far. Dollar index is back above 77 level and is set to take on 77.24 near term resistance. The greenback is also lifted as traders are paring short positions ahead of Wednesday's FOMC announcement. There were some speculations that Fed will hint on withdrawal from quantitative easing measures in the accompanying statement.

As noted before, the dollar is trying to draw support from 75.89 key support level and the development will very much depend on that on gold and crude oil. It now looks like that gold has topped out in near term ahead of 1033.9 key resistance and further pull back in the precious metal will provide additional support to the greenback. Whether dollar can stage a sizeable rebound will be subject to whether crude oil will finally take out the medium term trend line support to confirm that it has topped out at 75.0 earlier in August.

Looking at the dollar index again, we're holding on to the view that the five wave sequence from March high of 89.62 is near to complete, if not completed. 75.89 key support is expected to hold. Break of 77.24 minor resistance will be the first alert that dollar index has bottomed out and further break of 78.92 resistance will confirm this case by having the dollar index sustains above falling channel resistance. Our medium term view is unchanged too. Price actions from 88.4 are treated as three wave consolidation to larger up trend from 70.07. Nevertheless, whether this view is correct or not, a break of 78.93 should pave the way for strong rebound to 81 level.

Elsewhere, the oversold sterling is trying to recover against dollar and euro. GBP/USD is pressing an important head and shoulder top neckline support and might consolidate for a while in near term first. Such development might drag EUR/GBP lower a bit to digest recent sharp rally. But the overall outlook in pound remains bearish and we'd expect further weakness down the road.

In BoE's Quarterly Bulletin, the bank said that "savers in surplus countries may become more reluctant over time to invest funds in deficit-country government bonds" and that would probably raise borrowing costs in "deficit countries". That is, bond yields in deficit countries like UK and US may rise. UK's trade deficit was narrowed since hitting a record in September 2007, thanks to depreciation in the pound. The bank said that such depreciation maybe a part of a "more prolonged process of rebalancing of the UK economy, generating a fall in the long-run sustainable real exchange rate."

On the data front, UK Rightmove house price rose 0.6% mom, dropped -1.5% yoy in September. Canadian international securities transactions dropped sharply to 0.35b CAD in July. US Leading indicators rose 0.6% in August.

EUR/USD Mid-Day Outlook

Daily Pivots: (S1) 1.4656; (P) 1.4702; (R1) 1.4755; 

EUR/USD's break of 1.4640 minor support indicates that a short term top should be in place at 1.4765 on bearish divergence conditions in 4 hours MACD and RSI. Intraday bias remains mildly on the downside and further pull back should be seen towards 1.4500 support and possibly below. On the upside, above 1.4765 will indicate that pull back has completed and recent rally has resumed. Nevertheless, we'll continue to look for further loss of momentum and reversal signal as EUR/USD approaches 1.4867 key resistance level.

In the bigger picture, there is no change in the view that rise from 1.2456 is the third leg of the whole consolidation pattern that started at 1.2329. Such rally should be near to completion with current rise as the fifth wave in the five wave sequence from 1.2456. Upside should be limited by resistance zone of 61.8% retracement of 1.6039 to 1.2329 at 1.4622 and 1.4867 and finally bring reversal. On the downside, below 1.4177 support will be an important signal that EUR/USD has already topped out and break of 1.3747 support will be the confirmation. In such case, deeper decline should be seen that sends EUR/USD through 1.2329 low eventually.

Economic Indicators Update

GMT	Ccy	Events	Actual	Consensus	Previous	Revised
23:01	GBP	Rightmove House Prices M/M Sep	0.60%	--	-2.20%
23:01	GBP	Rightmove House Prices Y/Y Sep	-1.50%	--	-3.10%
23:01	GBP	BoE Quarterly Bulletin
12:30	CAD	International Securities Transactions (CAD) Jul	0.35B	7.76B	10.511B
14:00	USD	Leading Indicators Aug	0.60%	0.70%	0.60%
		Japan Market Holiday

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Daily Report: Dollar Back Under Pressure, Kiwi Shines Dollar is back under pressure after brief recovery on rebound in crude oil and gold as well as optimism of expansion in the Asian economies that fuel investors; appetite for higher yields. After brief retreat crude oil once again drew support from the medium term trend line and rebound back to above 70. On the other hand, gold is back to 1010 level after breaching 1000 briefly yesterday. Manila based Asian Development Bank said Asia, excluding Japan, will grow 3.9% in 2009, up from prior projection of 3.4% and may accelerate to 6.4% in 2010. New Zealand dollar is the strongest currency today after reporting the first current account surplus in six years. An article published in Financial Times called for coordination intervention from G7 countries to avoid unexpected plunge in dollar. The article, written by an UBS FX strategist argue that a plunge in the dollar will risk exporting deflation across the globe and tip G7 countries into liquidity traps where "extremely loose monetary and fiscal policies are unable to prise their economies out of deflation". Looking back at the dollar index, with 77.24 resistance intact, there is no confirmation of bottoming yet and another low below 76.03 support might still be seen. But, we continue to expect strong support from 75.89 key support level to finally conclude the whole five wave decline from March high of 89.62 and bring sizeable rebound to send the index back above 80 level. However, we'd emphasize again that development in crude oil and gold will be crucial on whether this 75.89 key support would finally hold. Focus will now be on whether crude oil will stay below last week's high of 73.19 and sustain below 70 on next fall and also on whether gold will extend the pull back from last week's high of 1025 to 983.2 support. A break above 73.19 and 1025 and oil and gold respectively will inevitably power the dollar index through 75.89 key support. Talking about the strength in NZD, AUD/NZD is still falling inside a near term channel and is heading to 1.2021 key support level. Momentum of the fall since April isn't too convincing yet and such fall is likely just part of the consolidation pattern that started at 1.2928 after failing 1.2966 key resistance. Strong support is expected from 1.2021 level to end recent decline and shift the relative strength back to Aussie. However, a firm break of 1.2021 will possibly strengthen and accelerate the trend in Kiwi which might re-establish it as the better candidate for carry trades. On the data front, New Zealand current account balance recorded first surplus of NZD 0.12B in six years in Q2. Swiss trade surplus came in narrower than expected at CHF 1.79B in August. Canadian retail sales is expected to rise 0.5% mom in July with ex auto sales dropped -0.1%. US house price index is expected to rise 0.5% mom in July. USD/JPY Daily Outlook Daily Pivots: (S1) 91.31; (P) 91.92; (R1) 92.53; More. USD/JPY's break of 91.42 minor support suggests that recovery from 90.12 has completed at 92.52 already. Intraday bias is flipped back to the downside for retesting 90.12 low first. Break will confirm whole fall form 97.77 has resumed for lower channel support at 89.56 next. On the upside, in case of another rise, we'd continue to expect recovery to be limited by 93.29 resistance and bring fall resumption . However, decisive break of 93.29 will indicate that whole fall from 97.77 has completed and will turn focus back to upper channel resistance (now at 96.46). In the bigger picture, on the one hand, USD/JPY is still trading well below 55 weeks EMA and the long term falling trend line resistance The lower highs, lower lows pattern since 2007 high of 124.13 is still intact. Weekly MACD is also staying negative. On the other hand, the choppy look of the fall from 101.43 so far argues that it's corrective in nature and thus suggests that rise from 87.12 is still in progress. The conflicting indications keep medium term outlook mixed and question remains on whether USD/JPY has bottomed out at 87.12 already. Focus is now on the lower channel support of the falling channel from 101.43. Sustained break there will indicate that the fall from 101.43 is accelerating which in turn argues that such fall is developing into an impulse. In other words, fall from 101.43 is part of the whole down trend from 124.12 and should extend beyond 87.12 low. On the other hand, while strong rebound from the channel support isn't an adequate signal of reversal, it will add more favor to the case that fall from 101.43 is merely a correction. Break of 97.77 resistance will further affirm the case that USD/JPY has bottomed out at 87.12 already. Economic Indicators Update GMT Ccy Events Actual Consensus Previous Revised 22:45 NZD Current Account Balance (NZD) Q2 0.12B -1.88B -1.25B -0.68B 6:15 CHF Trade Balance (CHF) Aug 1.79B 2.03B 2.35B 2.21B 12:30 CAD Retail Sales M/M Jul 0.50% 1.00% 12:30 CAD Retail Sales Less Autos M/M Jul -0.10% 1.00% 14:00 USD House Price Index M/M Jul 0.50% 0.50% Japan Market Holiday

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