The only real theme we can extract from the current trading patterns, during this summer lull, is the slow and steady erosion of risk appetite. Yesterday, UK inflation surprised to the upside, with the July CPI at 1.8% y/y vs. 1.5% y/y. Core CPI jumped to 1.8% y/y vs. 1.5% y/y. German ZEW Economic Sentiment index rose to 56.1 vs. 45.0 exp from 39.5, and the Current Situation index was firmer at -77…2 vs. -85.0 exp. Todays thin economic calendar means that markets will continue to drift and given the recent pattern in investor�s behavior we will be looking to sell risk correlated assets.
[B]News and Events:[/B]
The only real theme we can extract from the current trading patterns, during this summer lull, is the slow and steady erosion of risk appetite. The Shanghai composite continues to see large moves down, closing today -4.30% after yesterday�s short respite in selling (down over 20% from the years high). Commodity markets are not fairing much better, as crude can�t hold above $70.00bll and copper is pressuring critical support levels. FX markets are stuck in a listless range, with a break of 1.6260 in the cable likely to trigger further weakness. Yesterday, UK inflation surprised to the upside, with the July CPI at 1.8% y/y vs. 1.5% y/y. Core CPI jumped to 1.8% y/y vs. 1.5% y/y. The higher inflation figures gave the sterling a short term rebound, as the market speculated that the MPC would have to scale back the QE program. However, a single figure does not make a trend (despite the fact it was the second surprise this year) and the BoE has warned the market not to over analyze the volatile inflation data. We still expect the GBP to be a laggard, as the economic data in Q3 fails to meet expectations. On the continent, German ZEW Economic Sentiment index rose to 56.1 vs. 45.0 exp from 39.5, and the Current Situation index was firmer at -77…2 vs. -85.0 exp. The positive news was quickly grabbed by the markets to drive up risk correlated trades, but the pathetic attempt at optimism hastily hit a wall and the EUR lost all ground artificially gained. Today, a bunch of small time news articles have been the core market movers, which just goes to show how thin the FX markets are. A UK newspaper quoted opposition Conservative leader David Cameron, that cautioned that the level of the UK�s government debt could grow to the point were markets start demanding a higher premium to compensate for risk. And in Australia, The Age newspaper reported that Australia has signed an AUD50bn deal to supply China with liquefied natural gas for the next 20 years. Given the diplomatic tension between the two countries in recent weeks, this deal was a constructive step forward, as concerns that trade and investment might dry up were mounting. And finally, an article posted on PIMCOs website argued that USD weakness will support emerging market currencies, as there are currently no alternatives to the greenback. Todays thin economic calendar means that markets will continue to drift and given the recent pattern in investor�s behavior we will be looking to sell risk correlated assets.
Note on AUD: 0.8286 showed strong supply in early Asian trading but the pair has now come back to the lower uptrend channel just above 0.8182 / 90 providing a decent entry point for the AUD bulls. A slight concern here is that we are testing the trend line for the second time within 48 hours after just a 100 pip move higher in between so the bulls need to be cautious about the levels of supply just above. 0.8286 remains as an intraday shorting area with 0.8339 as resistance and the short sweet spot remains the same at 0.8390 area.
[B]Today’s Key Issues (time in GMT):[/B]
06:00 EUR Germany: PPI, % m/m (y/y) Jul -0.3 (-6.6)
08:00 EUR Current account, � bn (sa) Jun -1.2
08:00 Mainland GDP, % q/q (y/y) Q2 -0.4 exp, -1.0 (-1.4) prior
08:30 GBP BoE MPC minutes, vote Aug 9-0 prior
09:00 EUR Construction output, % m/m (y/y wda) Jun -2 (-8.0) exp
10:00 GBP CBI industrial trends survey, total orders, net bal Aug -59 exp
11:00 CAD CPI, % y/y Jul -0.8 exp, -0.3 prior
11:00 CAD Bank of Canada core CPI, % y/y Jul 1.9 exp, 1.9 prior
[B]The Risk Today: [/B]
[B]EurUsd:[/B] The intraday resistance highlighted yesterday at 1.4178 came into play overnight at the Asian open and has kept the pair rangebound with 1.4101 serving as a renewed support level. Intraday the trend is up with the pair having made higher highs and higher lows in the last 3 days but still a break above 1.4240 is needed to squeeze out the 10 day downtrend short sellers. Final medium term uptrend and support below at 1.4034.
[B]GbpUsd:[/B] Huge short stops triggered yesterday at 1.6467 propelling the pair straight to 1.6613 just 50 pips shy of the major hurdle at 1.6663. Looking at some alternative vibration channels on the pair we can see that any bounce from the support at 1.6435 has the potential to be met with selling at 1.6587 and the range bound action continues. Bank of England minutes out later today so hopefully there will be a catalyst to move us out of this range and get confirmation on the medium term uptrend or a break down to 1.5947
[B]UsdJpy:[/B] More of the same on USD JPY…The bears are in control short term with this 10 day downtrend coming into play yesterday at 95.16 / 29 and this morning we are seeing further weakness as the support at 94.25 breaks down. Support below at 93.86 and below there we have 93.37 which is also the bottom of the downtrend. Expect more selling at yesterdays highs around 95.29 and 95.43. A 60 minute close above 95.50 will break the bear momentum.
[B]UsdChf:[/B] The lower uptrend channel was tested at 1.0739 on the Asian open overnight and the pair held firm and has now moved up to test the new 2 day downtrend at 1.0787. Moving tighter and tighter into the corner of a triangle formation one can rest assured that the break either way will be worth following. Keep a very close eye on the pair for the next 48 hours and jump on the momentum upon either a breakout of 1.0797 or a break below 1.0739
[B]Resistance and Support:[/B]
By[B] Peter Rosenstreich [/B]- ACM Advanced Currency Markets, Geneva, Switzerland