Relief Over Payrolls Supports Risk Taking...For Now News and Events:

There was considerable hype leading up to Friday's US data with many considering the payroll numbers to be the awaited trigger for an upswing in the US. A large surprise to the upside would have further discouraged the Fed from introducing additional QE, which had it happened would have given the USD a strong boost. Private payrolls did surprise to the upside a bit, with August numbers coming in at 67k vs. a 40k expected. Concurrently, the prior reading was revised up to 107k from 71k. The Forex market reacted accordingly creating a short squeeze risk-rally which saw quick selling of the USD, JPY and CHF (safe haven currencies). The numbers were not high enough to trigger an upswing with any legs nor ensure the Fed would stay on the sidelines in the future.

The risk rally in FX was short lived because weaker-than-expected US ISM (non-manufacturing) numbers came in at 51.5 verse an expected 53.2. The news quickly reversed earlier gains and clearly it's way too early to declare a US Double Dip recession out of the question. Close of the week saw the S&P close higher and Forex risk-correlated trades followed, but that doesn't change the fact that investors remain disoriented and the futures market is looking a little hazy.

The divergence among news and markets is creating an increasingly precarious environment to trade in. In our view, there are significant market signals that point to a continued downslide with Gold prices rising, credit default swaps spreads in the EU widening and US yields further contracting. CFTC aggregate position data is hinting at a global market that is long risk in anticipation of a reversal in the mid term – however in the short term, safe haven flows will continue to place significant pressure on the market.

We expect the near term to go like this - EU data historically lags US data, so the EU will likely hit a economic soft patch in Q4. The divergence between EU member states will expand and the ECB's job will become increasingly difficult to regulate both healthy and ill economies with one policy. If you're a mid-term trader, the recent rally in EURUSD may be a good time to reload some short Euro positions.

In Japan, the shifting political landscape continues to capture the market's attention. The latest poll has Kan and Ozawa tied in the race for the DPJ Party's leadership. Interestingly, it has been Mr. Ozawa that has ratcheted up hawkish rhetoric surrounding the need for FX intervention, however details on actual Yen-weakening measures from Ozawa have been nonexistent.

While the contest carries on - Finance Minister Noda stated that intervention needed to be unilateral and gaining international support would be “difficult” at this time. We still believe that eventually (although it has been longer than we originally anticipated) Japanese policymakers will enact measures to deprecate the JPY. In the near term, dips in the USDJPY should be safe buying opportunities. If you are trading the USDJPY, keep an eye on US data as the pair has been highly sensitive to US news all summer.

Today, the USA is enjoying labor day and market movements during the US session will be subdued. Today will be a good day for some nice range bound trading – but do keep an eye on EURUSD, if the pair drops below 1.2850, it will confirm our false breakout hypothesis.

Today Key Issues:

• 00:00 USD Labor Day holiday
• 00:00 JPY BoJ Policy Board begins meeting (to tomorrow).
• 00:00 NOK Norges Bank Gov Gjedrem speech in Oslo
• 00:00 EUR EU FinMins discuss changes to EU budget rules.
• 09:00 EUR ECB Stark at Berlin conference.
• 23:01 GBP BRC retail sales monitor, total sales,

The Risk Today:

EurUsd Since bursting above 1.2780 resistance last week, EURUSD has been on an impressive run higher, with the bulls managing to push us back above 1.2900 this morning –the first target for our double bottom pattern on the hourly chart. As documented last week, we are long at 1.2800, but have taken half our position off the table at 1.2900 despite the fact that the theoretical target for the double bottom should, according to traditional measures, be around 1.2970. The decision to be a little more conservative is due to significant resistance at 1.2930 (major ceiling of supply from mid-August); but as the trade has matured over the weekend, the back side of the former 2-month uptrend has drifted higher to 1.3000 levels which does give us a little more conviction to hold the remaining half of the position until 1.2950 levels. Given the massive psychological importance of 1.3000 we would actually prefer to start scaling into shorts above 1.2950 (with a stop above 1.3000) rather than hold out for a 1.2970 target. Expect 1.3000 to hold on the first test at the very least, but should the pair surge higher then it opens up a clear path to 1.3227 (10 Aug high) and 1.3325 (200-day moving average). Our base case is that the bears will step in ahead of 1.3000 and drive us back towards 1.2855 (1 Sep resistance-turned-support), 1.2780 break-out level, 1.2687 (100-day moving average) and 1.2588 (24 Aug low).

GbpUsd The bulls have had a second attempt at rallying higher scuppered by resistance at 1.5490, and with a light data calendar ahead we expected range-trading games to bring GBPUSD back lower in the coming session. With the pair still poised just below 1.549 at the moment, we see this as an attractive area to go short, setting a stop just through 2-week downtrend resistance (around 1.5540) and looking for a return towards 1.5325 (31 Aug low and former fibonacci retracement level). With downtrends still in vogue at the moment, there is clearly scope for an extended move through 1.5325, so look for next levels to coincide with 1.5280-1.5300 (trendline support), 1.5235, and then major support kicks in at 1.5115-25 (50% fibonacci level and 21 Jul lows). For the bulls to buck the trend, they will first need to conquer 1.5490, then 1.5580 (23.6% fibonacci retracement of 1.4229 –1.6000), but then the way is clear for a test of major resistance at 1.5715.

UsdJpy After a payroll inspired spike on Friday which punctured the 2-month downtrend channel (topping out at 85.22), USDJPY failed to sustain this upward momentum and has instead slumped all the way back into the channel and continued business as usual in a tight range between 84.00-50. We still expect a high chance of another visit to 83.60 (24 Aug low) as the week draws on and BoJ intervention remains absent, then a trip to the lower edge of the 6-week downtrend (currently 82.50). Really not many technical landmarks are highlighted below as this area has not been explored since 1995. Our short-medium term target (barring the possibility of physical BoJ intervention) is therefore the 79.75 –80.00 area where the pair bottomed out on that run 15 years ago. On the topside the key levels of note are the 85.22 peak from Friday, major resistance at 85.90 and 86.50 (5 Aug high).

UsdChf USDCHF continues to be dominated by its 1-month downtrend, despite the short squeeze to 1.0240 on Friday after non-farm payrolls data came out better than expected. Although this spike punctured that downtrend channel briefly, the rally failed to garner any follow-up support and is now back inside the channel and driftng lower. We still think that a return to parity is inevitable, and below there the key remaining supports 0.9960 (3 Dec 2009 low) and 0.9920 (26 Nov 2009 low). Expect rallies to be hindered by resistance through 1.0185, and 1.0240 where the rally came to an abrupt halt on Friday. Extended rallies likely to be blocked by 1.0550 (13 Aug high), 1.0640 (27 Jul high), and 1.0675 (200-day moving average).