USD Punished For Lagging Economic Data & Markets Growing Risk Appetite

News and Events:

The USD is currently under siege. Despite the stronger-than-expected ISM figures bolstering global equity markets, the downward trend in US economic data and the anti-recovery remarks from notable speakers have taken their toll. The conversation is heavily skewed toward additional forms of QE by the Fed, in what form we're not exactly sure. Fed Chairman Bernanke stated that the US had a 'considerable way to go' before a complete recovery would be reached. The Fed is continuing its strong policy to support the recovery.

While the markets have been trading in confidence over the past few weeks - lots of strategists, analysts and pundits seem to be forewarning traders that another crises may be on the horizon. Perhaps it is just a function of the fact that these same talking heads were completely blindsided by the plethora of crises in the last 3 years and are now diligently keeping their finger on the panic button. Or, maybe the low liquidity during the summer session is just heightening their collective anxiety.

We are still very concerned about the structural problem of the EU, but also now about the lopsided US recovery and recent Chinese attempt to balance growth and inflation. We hold that August will not provide any absolute conclusions nor directions - certainly not anything institutional participants are looking for. Instead the relief that growth is stable and the results from the stress test didn't cause a panic should keep overall sentiment positive - although the market is still pricing in a possible EU breakup. For the remainder of the summer we suspect risk-correlated trades will continue to appreciate while the USD suffers.

If anything does change, it will be the market prices which will be the 'canaries in the coal mine' and not the economists.

In Australia, the RBA held cash rate steady at 4.50% as we anticipated after last week's poor Q2 CPI reading. Given the consensus view and resulting decision, the accompanying statement from the RBA failed to shed any light into what they're thinking. If pressed, we would say that the language sounded slightly concerned about the global growth trend over the coming year and doubtful about Chinese attempts to decelerate growth to a sustainable level. A portion of the statement read 'global outlook remains somewhat more uncertain than a few months ago and this is reflected in the volatility of financial prices.' The RBA was one of the first G10 central banks to begin tightening, so we are now in the fortunate position of being able to sit back and let economic data print. The Australian Statement of Monetary Policy is expected to be released on Friday, the report will be an opportunity for the RBA to shift its economic forecast if it so desires.

The weaker CPI reading from Switzerland has just added to the volatility and speculation over EURCHF. Despite the weak inflation reading, growth-supportive conditions are entrenched and we expect a policy rate adjustment in September which will give the Swiss Franc a nice boost.

Sterling was the bigger winner yesterday as UK PMI surprised to the upside at 57.3 vs. an expected 57.0. Further, the Shadow MPC voted 7-2, the minority votes opting for a .50 bps hike to 1%. We suspect the market is overconfident that MPC members will remain dovish when faced with solid growth data and stubborn inflation - overall we remain bullish on the Pound.

On a final note, we still believe that the market is underestimating the possibility of a Japanese intervention in pricing. The discussion surrounding the strong Yen is growing more vocal and we're seeing a slow crescendo in rhetoric. Continued Yen appreciation has been described as undesirable by Kan, Noda and Shirakawa - the Prime Minister, Minister of Finance and a member of the Bank of Japan respectively. Right now, we are taking the opportunity to buy USDJYP at the current depressed level.

Lots of economic data coming out in the US session will briefly hold the market's attention - but with big central bank rate decisions around the corner and this Friday's NFPs, most traders should hold off on building any large positions right now.

Today Key Issues:

• 07:15 CHF Jul CPI, - 0.5 (0.6) exp
• 08:30 GBP PMI construction 58.0 exp , 58.4 prior
• 09:00 EUR Jun PPI, 0.4 (3.2) exp, 0.3 (3.2) prior
• 12:30 USD Personal income, 0.2 exp, 0.4% prior
• 12:30 USD Personal spending, 0.1% exp, 0.2% prior
• 12:30 USD Core PCE price index, 1.3 exp, 0.0 prior
• 00:00 USD Vehicle sales,
• 14:00 USD Factory orders, 0.5 exp, -1.4 prior
• 14:00 USD Pending home sales, % m/mJun 4.0 exp, -30 prior

The Risk Today:

EurUsd Another burst higher for EURUSD has pushed us to new highs of 1.3195 and it's so far so good for the bullish triangle pattern we have been engaged in for the past week. We are still sitting tight for an eventual target of 1.3290, but for those who missed the entry point back down around 1.2950 there is now a second opportunity to get long materializing here. We see a potential bullish flag pattern on the hourly chart which would become activated on a break above 1.3185 and which would look to target 1.3300 -virtually the same as our triangle target. The only resistance levels left before either target are 1.3213 and 1.3254 (14 and 13 May highs respectively); so risk-reward definitely looks favourable for these bullish trades. Should the bears re-emerge, they will likely find good bidders waiting eagerly to get long around 1.3106 former pivot level, not to mention at the 5-week uptrend channel support at 1.3055.

GbpUsd Like a hot knife through butter, GBPUSD is slicing through topside resistance levels like they're not even there; the latest victim being the 17 Feb high 1.5816 which gave way without so much as a whimper. We have also clambered above 1.5866 (61.8% fibonacci retracement of the sell off from 1.6878 to 1.4229), and that should now act as a decent pivot level to buy off. The only resistance level worth paying attention to in the near term is the hugely significant 1.6000 barrier where option-related interest may block the route higher on the first few attempts; and in addition further rallies will have a decent pocket of supply to overcome around the top edge of the current 2-month uptrend (currently 1.6040) Nevertheless, to say GBP has a bid tone would be an understatement, so expect buyers to jump in keenly back towards that 1.5866 fibonacci level, then again at 1.5660 (former resistance now turned support) and the 200-day moving average at 1.5537.

UsdJpy USDJPY still looks extremely vulnerable after its dip to new 2010 lows of 85.98, and yesterday's attempted recovery only got as far as 86.89 before the bears got the better of it once more. 85.98 looks set to be challenged again this morning, and should we take a tumble below there then the prospects look grim for anyone still clinging to longs; downtrend channel support at 85.50 is the only demand anticipated ahead of the November 2009 low of 84.83. Rallies are likely to face strong resistance towards 86.89 (yesterday's high), and in the unlikely event the bulls can push above there, ample selling interest should precipitate around 87.50-60 (2-month downtrend resistance and back side of former 1-week uptrend) with 88.00 also just behind.

UsdChf What a choppy mess! Although USDCHF may have looked somewhat directionless and rangebound in the past few days, the overwhelming message from the rest of the currency space appears to be 'sell the dollar', so this may be a pair worth watching for a downside break before it actually takes place. The downside level to watch will be yesterday's low 1.0348, which has only weak former downtrend support below it at 1.0305. Below there we start looking back to levels not seen since the beginning of the year; namely the 19 Jan low 1.0229 and the 11 Jan low 1.0131. Selling interest is expected to materialize around 1.0415 (today's high) and then again at yesterday's peak of 1.0476.