Participants are still trying to make heads or tails of yesterday's very volatile London session. The overriding question to us is why the markets sold off the USD. It would be easy enough just to dismiss as a resurgence of risk appetite, yet that would be too simplistic. While may FX risk correlated trade illustrated the appropriate patterns, the CHF and JPY, which should have also been weak, were two of the best performers. Others pointed to the rally in gold, which penetrated the $1,000oz psychological resistance, the UN report, which argued for diversification away for the USD, recovery in Euro zone and China efforts to impress the CNY on trading partners (a alternative global reserve currency). But none of these are new or encapsulate yesterday's activity fully. Perhaps the best explanation was the expectations by traders of an eventual breakout from the end of summer sideways trend. So the sudden volatiltiy in select assets caused traders to pile in blindly, based primarily on technical levels. Today, Asian equity indexes were broadly lower, which helped to take the pressure of the USD. Yet, risk correlated trades have not surely normalized.. This morning, in Japan, leading and coincident indexes for July both beat consensus expectations while both readings for June were revised higher. While in Australia retail sales printed below expectations at -0.5% m/m vs. 1.0% exp, June's estimates were revised higher. AUD continued to outperform as correlation to, risk appetite, commodity prices, China and expectations that central banks diversifications strategy will involve accumulating the currency. However, with employment data skewed to the downside the string of softer figures could begin to weigh on the currency. With a quiet day for economic data, we expect low volume trading to be choppy and listless. The Fed will release its Beige book report, which is expect to show relative improvement in the US economy. Tonight traders will be watching the RBNZ rate decision. While it's expected that the central bank will hold rates at 2.50%, attention will be focused on the accompanying statement for any hints on whether or not the easing bias will be retained.

Tech Note on CADJPY: A break below 85.48 will be a break of the one week uptrend and atrract shorting. A move above 85.91 will be a break of the 2 day downtrend and attract longs playing the continuation fo the one week uptrend.

 Today's Key Issues (time in GMT):

00:00 GBP BoE MPC meeting starts (to 10/9)
07:30 SEK Industrial production, % m/m Jul -2.5 prior
08:30 GBP Trade balance, £ bn Jul -6.4 exp, -6.4% prior
14:00 MXN CPI, % m/m Aug 0.27 exp
12:00 USD FRB of Chicago President Evans speaks on The Great Inflation Debate
14:15 EUR ECB Executive Board member González-Parámo at 30th anniversary of Bürgenstock
14:20 NOK Norges Bank Deputy Governor Nyberg speaks on The Baltic region in the shadow of the financial crisis in Stockholm
17:55 USD FRB of Dallas President Fisher speaks on Current Economic Issues and Opportunities for Texas
18:00 USD Fed's Beige Book published
21:00 NZD RBNZ rate Announcement Sep 2.5 exp/ prior

The Risk Today:

EurUsd The pair made its first visit to 1.4445 yesterday and after a very brief round of short interest hitting the pair back to 1.4415, the squeeze kicked in stopping a large number of intraday short sellers in the process. Looking at the daily chart, there is some fairly significant resistance in front, firstly at 1.4569 and thereafter at 1.4684. A move above those levels would be disastrous for the USD and with most asset class correlation waning there is a suggestion that this scenario is less likely, particularly with some minor RSI divergence on the daily picture. More likely is a test back down to 1.4445 today to see if yesterdays move was purely flow driven, ie. stops getting triggered, or is there real medium term money flowing into the Euro. Below there we have a very strong support at 1.4360/80 and the medium term uptrend comes in at 1.4277. Expect long interest at these levels.

GbpUsd It is best to look at cable on a daily picture these days as it is the best illustration of the upcoming cap on risk currencies that we have been discussing for weeks now. After breaking the medium term mid uptrend channel, the pair has caught some support from one of the long term lower down trend channels at 1.6115, just above the support at 1.6080. We have also been discussing a potential head and shoulders where we would like to see a neckline between 1.5947 and 1.5985, but after the pairs rally to back above 1.6435, we can say that for now the visit to 1.6115 is close enough for a neckline. The top of the shoulder on this head and shoulders would come in between 1.6663 and 1.6745 so should we get there expect some sensible short interest from anybody who is paying attention the the long term state of the UK economy.

UsdJpy The range on USD JPY is getting extremely tight once again, caught between the 8 month uptrend at 92.25 and the 4 week downtrend at 93.10. With a range so tight it could be considered foolish to take a position for anything longer than intraday. A close below 91.80 on the 4 hour chart will spell the beginnings of more Yen strength.

UsdChf The pair finally broke down from their descending triangle that we highlighted some week back and moved very swiftly to the first support at 1.0452. Most breakdowns and breakouts retest the breaking point so a visit to 1.0550 will likely be met with fresh short selling in preparation for a visit to 1.0337.

Resistance and Support:

EURUSD     GBPUSD     USDJPY     USDCHF
1.4725     1.6700     95.20     1.0700
1.4684     1.6630     94.50     1.0610
1.4569     1.6590     93.10     1.0550
1.4502     1.6506     92.49     1.0458
1.4445     1.6410     91.80     1.0452
1.4375     1.6360     91.20     1.0337
1.4330     1.6310     90.50     1.0265
S: Strong, M: Minor, T: Trendline, K: Keylevel, P: Pivot