Risk Aversion Back Moving Markets

It seems that investor�s confidence in the V-Shaped recovery in now being seriously questioned. Last week, both US retail Sales and Michigan consumer sentiment fell against the consensuses optimist view. Investor�s sentiment also took a hit, as US regulators took control of Colonial Bank (the 77th US bank failure this year- WSJ). The GBPUSD came under significant pressure today and has broken critical the trend line support in European trading, which comes in at 1.6455, and quickly slid past last week’s low of 1.6392.

[B]News and Events:
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It seems that investor�s confidence in the V-Shaped recovery in now being seriously questioned. Not just by the mixed economic data, but failure of markets (including FX ) to break highs and sustain their bullish moment. Last week, both US retail Sales and Michigan consumer sentiment fell against the consensuses optimist view. News that countered the earlier released encouraging Eurozone GDP data. Investor�s sentiment also took a hit, as US regulators took control of Colonial Bank (the 77th US bank failure this year- WSJ). The USD and JPY performed well, as risky assets were sold across the board. Asian Equity indexes dropped sharply with Shanghai falling -5.78%… Interestingly, much of the speculation regarding a recovery has been driven by improvements in the equity markets. While the equity markets are often a seen as a leading indicator, we are worried their bullish momentum is more a function of homeless capital than expanding output. The GBPUSD came under significant pressure today and has broken critical the trend line support in European trading, which comes in at 1.6455, and quickly slid past last week’s low of 1.6392. On a side note, the recent CFTC position data (week of August 11th) had traders unwinding short USD positions (largest reversal against the CHF and EUR). Perhaps predictive indicators, as traders brace themselves for the �double dip.� We are taking a slightly bearish view on risk appetite, primarily on the technical stand point, that failure to break key resistance often leads to a reversal. Interestingly, commodity currencies position was relatively unchanged, as they remain the most popular positions to hold. On the economic data front, Japan�s preliminary GDP estimate for Q2 showed that Japan 's economy grew by 0.9% q/q vs. 1.0% exp. This positive figure ends 4 consecutive quarters of negative growth. In addition, the expansion was export driven, with net exports contributing 1.6% to q/q growth. This week�s upcoming data will give us a clearer image on how the economy is performing, which could either change the investor�s opinion and drive stocks, commodities, and high yielding currencies up or continue to in the risk aversion theme. Focus will be on US manufacturing index released earlier today; inflation data from Euro Zone , UK , and Canada ; consumer confidence in Germany ; and US home sales.

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Today’s Key Issues (time in GMT):[/B]

07:15 CHF Adjusted real retail sales, % y/y Jun -1.4 prior
08:00 NOK Trade balance, NOK bn Jul 22.4 prior
09:00 EUR Trade balance, � bn (sa) Jun 0.8 prior
12:30 USD Empire State manufacturing index Aug 2.00 exp, -0.55 prior
13:00 USD Net long-term TIC flows, $bn Jun -19.8 prior
17:00 USD NAHB housing index Aug 18 exp, 17 prior

[B]The Risk Today: [/B]

[B]EurUsd:[/B] The 10 day downtrend came into play Friday afternoon with sellers arriving in their droves at 1.4306 with the pair now resting on support at 1.4090 / 35. The final level for the bulls to defend here is the lower 5 month uptrend channel at 1.4010 / 34 and failure there will spell the beginning of a significant USD strength. Resistance above at 1.4178 / 90 and then the usual levels at 1.424 followed by the 10 day downtrend. One interesting thing to note is the 60 minute RSI looking likely to break down to new lows around the 30 level, if this happens in conjunction with a sub 1.4100 print then expect major stops to get triggered and the test of the 5 month uptrend becomes imminent.

[B]GbpUsd:[/B] Looking at cable on a daily chart here at 1.6347, there is a 6 month uptrend channel couple with a huge support level below at 1.6272. The daily stochastics are oversold and the RSI is sitting at 41 (above 40 is considered bullish) so expect some long interest at these levels with a 1.6663 target.

[B]UsdJpy:[/B] As suspected, the USD JPY 5 week uptrend is well and truly over and now there is only support at 94.45 for the sellers to contend with. Any weakness here looks dangerous as the next level is way down at 93.86. Expect the downtrend at 95.85 to put a cap on any upmoves

[B]UsdChf:[/B] The trade idea from Friday was a narrow escape with our 1.0670 long stop being narrowly escaped by only one and half pips and the target of 1.0764 was met early this morning. The pair has broken the 5 day downtrend and now has 1.0797 to try and push through but for intraday traders this level looks likely to attract short sellers on its first attempt with a target of 1.0739. Any break higher will be met by resistance at 1.0844 and 1.0891.

[B]Resistance and Support:

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By[B] Peter Rosenstreich [/B]- ACM Advanced Currency Markets, Geneva, Switzerland