Risk aversion dominated the markets today on worries that US would re-enter into recession while fear of contagion in European debt crisis persisted. DOW plummeted -512 pts, or -4.31%, the largest decline since the 2008 financial crisis. S&P 500 dropped -4.78% while Nasdaq was down -5.07%. All these three major indices are closed more than 10% below the yearly high set in early May. The CRB commodity index dropped -2.77% and is back below 328 level, and is now facing 326.88 2011 low. Crude oil followed and was down -6% and reached as low as 86.04. 2-year yield dived to record low while longer term yield, 10 year yield dropped to 2.458% (down -0.141%), and 30 year yield dropped to 3.72% (down -0.151%). So in short, markets panicked.

Usually, Swiss Franc and the Japanese yen should be the biggest winner in such circumstance. But, SNB and BoJ has just intervened in the markets this week. (see SNB Goes For Quantitative Easing As Franc Appreciates Sharply and BOJ Extends Size Of Asset Purchase Program After Currency Intervention). That left the dollar as the safe haven currency to go for in such risk averse environment and the greenback was sharply up across the board. Gold reversed sharply after hitting new record high of 1684.9, partly thanks to strength in the greenback.

Looking at the technicals, there are a few important points to note:

  1. Euro, Sterling and Dollar are still kept in range, with Sterling having a little bit of upper hand against the other two. The major moves are still unlikely in these crosses and we'd maintain the view that they're going nowhere against each other. Even though EUR/GBP seems a bit weak, it could easily reverse if GBP/USD catches up with selloff in other currencies against dollar.
  2. Judging from the price actions on Wednesday and Thursday, SNB's intervention was far weaker than BoJ's. USD/CHF is somewhat back under pressure as today's US session ends. GBP/CHF is back pressing this week's low while EUR/CHF has indeed made another record low. We'd maintain our bullish view in Swiss Franc in general but note that while more downside is expected in major swiss crosses, USD/CHF should be avoided.
  3. Commodity currencies are all weak. It's still a bit early to call for medium term reversal in AUD, NZD and CAD but these three are looking very vulnerable now. Key levels should be watched closely, including 1.0390 in AUD/USD, 0.8109 in NZD/USD, 0.9912 in USD/CAD. Decisive break of these level will trigger even deeper selloff in commodity currencies, which would then confirm medium term reversal.

Non-farm payroll report from US on Friday will be the next key events to shake up the markets. Economists expect payroll to gain 98k in July while unemployment rate is expected to be unchanged at 9.2%. Sharp deterioration in the employment component of the ISM manufacturing index (59.9 in Jun to 53.5 in Jul) and non-manufacturing index (52.0 in Jun to 50.5 in Jul) argues that we should have any upside surprise in Friday's report. Though, the terribly poor 18k figure in June does leave some room for upward revision. Meanwhile, deterioration in consumer confidence argue that the unemployment is more vulnerable to upside surprises. In any case, note that a good set of numbers tomorrow won't ease the concern of recession in US. And a bad set of numbers will intensify speculations of QE3 but markets are getting doubtful about the effectiveness of more QE from Fed. So, sentiments will likely remain bad no matter what number we get and recovery in risks, if that happens, should only be a result of weekend profit taking rather than reversal in the near term trends. Also, considering the steep selloff in risks on Thursday, there isn't much room for more bearish acts on Friday. So, the strategy is, hold short on risks and tighten your stops just ahead of NFP. If the trend extends, take profit before you go. If stops are hit, stop trading and start enjoying an early weekend!