• USD finally showing signs of recovery in negative sentiment environment
  • Gold pulls back from record highs and closes lower despite risk off markets
  • US debt ceiling discussions could see breakthrough on Thursday
  • Durable goods and Fed Beige Book come in on the downbeat side
  • Antipodean currencies confound but weakness on the horizon

The US Dollar was well bid for the most part in Wednesday trade and is showing the potential for a rally ahead after finally managing to end a string of several down days. The Euro was hit the hardest on a combination of more uncertainty surrounding the debt crisis in the region and some softer local data, while technical studies also supported the drop, with the market adhering to a sequence of medium-term lower tops since May. US debt ceiling discussions showed little room for any renewed optimism, but the appeal of the Greenback despite this fact and despite some major setbacks in US equities was rather impressive. Perhaps even more interesting was the fact that even gold prices showed weakness despite the negative risk environment. One compelling explanation for the pullback in gold and rally in the buck could be that traders are sensing a Thursday resolution to the debt ceiling talks. Any confirmation that the debt ceiling deadline will be met, should create a situation where gold stands to lose and the USD stands to gain. Both markets have shown an inverse reaction to the debt ceiling uncertainty and threat of default, and as such, we could see a reversal of fortunes in the event of a forthcoming resolution.

We are however still scratching our heads with the price action in the Australian and New Zealand Dollars, with the antipodeans continuing to drive higher despite the uncertain global macro environment and liquidation of other risk correlated asset classes. The Australian Dollar propelled to fresh post-float record highs on Wednesday following the release of some hotter than expected inflation data, while Kiwi sits just off its own post-float record highs on some more encouraging local fundamentals. Most recently, the RBNZ has come out leaving rates on hold as expected at 2.50%, but sounding hawkish after saying that there was little need for the emergency 50bp rate cut from March tor remain in place much longer, provided that the local economy continued to show signs of recovery and that global financial risks also receded. Still, Bollard also expressed concern over the rising Kiwi and felt that the need to rate hikes could be offset by the strength of the New Zealand Dollar.

We also contend that the antipodeans have been overly bid of late, with both Aussie and Kiwi very overextended and not properly reacting to the broader global macro uncertainty and threats to the global economy. As such, we continue to warn of some major relative underperformance in both the New Zealand and Australian Dollars going forward. It is also worth noting that the relative outperformance in the Australian Dollar on Wednesday came on the back of higher inflation rather than on any solid economic data. Our point here is that the Australian economy has been showing signs of deterioration in recent months and this in conjunction with rising inflation could present some serious challenges for the RBA and ultimately weigh on the currency (despite the on the surface positive yield implications of higher inflation).

Looking ahead, German unemployment, Eurozone consumer confidence and UK CBI reported sales are some of the key economic releases in European trade, while broader global macro themes relating to Eurozone crisis and US debt ceiling discussions should continue to influence price action. US equity futures and commodities prices are all in the process of consolidating their latest declines. It seems like it has been quite a while since we have seen equities and gold prices both lower on the same day. Perhaps this warns of a pickup in volatility on Thursday.

ECONOMIC CALENDAR

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TECHNICAL OUTLOOK

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EUR/USD: The market has been carving out a series of lower tops since stalling shy of 1.5000 in early May, and the latest rally still maintains the integrity of this broader downtrend. If the market is to adhere to this broader downtrend, a fresh lower top could take form somewhere below the previous lower top from July 4 at 1.4580. At this point, 1.4580 becomes the key level of resistance, and only a break above this level will officially relieve downside pressures and open the door for a bullish shift in the structure. Until then, we are still in a broader downtrend and would therefore be looking for opportunities to fade the move. Wednesday's bearish outside day formation certainly reaffirms these prospects, with the next lower top below 1.4580 now potentially in place at 1.4535.

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USD/JPY: The latest daily close below 79.50 certainly compromises our constructive outlook with the market breaking down below some solid multi-day range support in the 80.00 area and dropping into the 77.00's thus far. This now puts the pressure back on the downside and opens the door for a retest and potential break below the record lows from March by 76.30. At this point, a daily close back above 78.70 would be required at minimum to relieve downside pressures.

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GBP/USD: Despite the latest rally back above 1.6300, the market still remains locked in a broader downtrend off of the April highs, and a fresh lower top is now sought out somewhere ahead of 1.6550 ahead of the next downside extension back towards the recent range lows at 1.5780. Ultimately, only a break back above 1.6550 would delay bearish outlook and give reason for pause. Wednesday's bearish formation certainly reaffirms these prospects, with the next lower top now potentially in place at 1.6440.

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USD/CHF: Despite the intense downtrend resulting in recently established fresh record lows below 0.8100, short/medium/longer-term technical studies are looking quite stretched to us, and we continue to like the idea of taking shots at buying in anticipation of a major base. The latest declines have stalled by major psychological barriers at 0.8000, and we look for a break back and close back above 0.8100 to reaffirm basing outlook and accelerate gains to even more significant resistance by 0.8550 further up. Ultimately however, it will take a break above 0.8550 to officially relieve downside pressures and force a shift in the structure. Any additional declines to fresh record lows below 0.8000 are viewed as an excellent counter-trend opportunity.