It seems the short term concerns witnessed yesterday, regarding the possibility of a Fed policy shift, have faded into the background and with it the temporary USD support. Risk correlated trades have rallied back at the start of the European session, as news from Asia supported resurgence of regional economic demand. First was the New Zealand current account balance, which improved to -5.9% of GDP from a -8.1% (revised) deficit in Q1 ‘09. This Q2 current account reading came in at a surplus of $NZ124mn, which was the first current account surplus in NZ since 2003. This was a positive surprise both for the domestic conditions as well as regional demand and was embraced by NZD bulls. The optimism continued, as the Asian Development Bank upgraded its forecast for regional economic growth to 3.9% in 2009 and a very healthy 6.4% in 2010 (China’s specifically was upgraded to 8.2% and 8.9%). ADB chief economist Jong-Wha Lee stated that despite worsening conditions in the global economic environment, developing Asia is poised to lead the recovery from the worldwide slowdown. Spot Gold rallied to $1,008.0oz, while Crude wti traded above $70.bll. The light economic calendar should keep the current risk appetite trend intact. Yesterday, SNB's Hildebrand commented that the crisis is not yet finished and that it is too early to introduce exit strategies. He also said that inflation outlook would be the key measurement for monetary policy decisions. The debate on reading policy outlook is now in full swing, as central banks start to deviate. This will become increasingly important to FX traders, as the varying interest rate expectations will begin to define FX pricing to a greater extent (over pure risk appetite). The current thinking is that the first G10 central banks to shift policy will be the RBA and Norges Bank in Q4 2009. Then, the second group will be the ECB, Fed, SNB, BoC and RBNZ in Q2-3 2010 and the laggards in late 2010 will be the BoE and BoJ. In the short term, we highly doubt that the Fed will change its stance at Wednesday’s FOMC meeting, partially the reason for current USD weakness. In Canada, strong auto sales should give headline retail sales a boost (0.7% m/m exp vs.1.0% prior). However, when you carve out autos, the figures drop preciously (0.1% exp vs, 1.0% prior). CAD should stay supported against the USD, as rally in risk assets continued. However, it should under perform against other commodity currencies. In the EM space, South Africa’s SARB is expected to hold rates steady at 7.00%. It is likely to be a quiet day in terms of news with only second tier data release and the G20 meeting, the MPC minutes and FOMC meeting to come.


Today's Key Issues (time in GMT):

00:00 JPY Japan: Public holiday

00:00 ZAR SARB interest rate announcement, % Sep 7.00 exp/prior

05:45 CHF SECO Economic forecasts published Sep

06:15 CHF Trade balance, CHF bn (nsa) Aug 2 1.57 2.35 1.2 -

12:30 CAD Retail Sales m/m 0.7 exp, 1.0% prior

12:30 CAD Retail Sales less Auto m/m 0.1% exp, 1.0% prior

14:00 USD FHFA house price index, % m/m (y/y) Jul 0.5 (-3.9) exp

14:00 USD Richmond Fed Manufact Index 16 exp, 14. prior

18:30 MXN Unemployment Rate aug 6.00% exp, 6.12% prior

22:45 NZD GDP % q/q Q2 -0.2 exp

The Risk Today:

EurUsd The pair is on a breakout this morning having broken the intraday downtrend late yesterday afternoon but the timing of this move suggests it is part of an extremely large multi asset trade executed around the market open in Europe. The 4 hour RSI still continues to trend in the completely opposite direction so I would not be getting overly bullish or joining the long crowd until that changes, if at all.

GbpUsd We mentioned yesterday that the head and shoulders on cable is likely to be a compound head and shoulders, where there are two shoulders on each side and two necklines, one slightly higher than the other. This has been confirmed this morning with a solid rally and short covering from 1.6188 up to the first resistance at 1.6340. This is likely to provide a good short entry level for those playing the larger set of shoulders where the neckline sits at 1.5947 and in the event that it trades higher the pair should be capped by the downtrend and further resistance at 1.6435 in the short term.

UsdJpy The ascending triangle target of 92.50 was met yesterday afternoon as the pair squeezed higher to 92.54 before attracting short selling once again as expected. The pair has now dropped back into the 6 week downtrend with a very clear tradeable range on the 5 minute chart between 91.20 and 91.70. Since we are in a downtrend within a downtrend, it would probably make sense to only play the short side at 91.65/70. A move back above 92.00 would negate this picture.

UsdChf We said yesterday that 1.0390 would likely put a cap on the pair with some fresh short selling on the upper downtrend line and true to form, the pair topped out at 1.03897. USD CHF is behaving very well lately from a technical standpoint and the wider downtrend channel is now in full play giving us a all a MUCH wider range to play. A little oversold on the 1 hour chart this morning but expect fresh shorting should the pair move back into the 1.0300-1.0340 range.

Resistance and Support:

1.4910 1.6700 93.70 1.0540
1.4850 1.6435 92.00 1.0390
1.4870 1.6340 91.70 1.0340
1.4782 1.6326 91.39 1.0249
1.4700 1.6210 91.25 1.0205
1.4569 1.6115 90.50 1.0175
1.4520 1.5947 89.90 1.0130
S: Strong, M: Minor, T: Trendline, K: Keylevel, P: Pivot