Daily Report: Dollar Driven by More Reserve Talks

Dollar recovers as the week starts following comment from PBoC Governor Zhou that there are no "sudden changes" in China's stable foreign exchange reserve policy. Zhou emphasized that the policy aims at "liquidity, safety and returns." The dollar was sold off last Friday after PBoC called for a "super-sovereign reserve currency" that's delinked from the economies of the issuers in the annual financial stability report. Traders pare some speculation that China will be speeding up diversifications of its $1.95T reserve soon after today's comment from Zhou.

However, the dollar's strength was limited as the news was countered by comments from comments from head of the Arab Monetary Fund. Jassem al-Mannai, director general of AMF, said that dollar is underway a heavy burden through accumulating huge debt in the current crisis and China and Russia are proposing a more international reserve currency other than the dollar. He said that these developments could affect the dollar "negatively" and cannot be ignored. He also mentioned that the Gulf region's central banks could adoption options other than a strict dollar peg, including basket, floating exchange rates, dollar options, managed float.

Dollar index is back above 80 level, also helped by oil's break of 69 level as well as pull back in global stocks. Though, the overall outlook in dollar remains rather mixed. EUR/USD is still bounded in range of 1.3826/4137, GBP/USD in range of 1.6185/6617, AUD/USD in range of 0.7931/8117, USD/CAD in range of 1.1418/1636. Dollar index is still in range of 79.56 and 80.94. We continue to favor the case that fall from 89.62 has completed at 78.33 even though the view is a bit shaky. We'd prefer to stay neutral for the moment and wait for a break of 80.94 resistance to confirm resumption of rebound form 78.33 to key resistance 82.62 (38.2% retracement of 89.62 to 78.93 at 82.64). Meanwhile a break below 79.19 support will suggests that a new low below 78.33 should be seen before bottoming. Though, even in such case, we'd still expect downside to be contained by 77.69 key support to conclude the fall from 89.62. In any case, a breakout is anticipated this week considering the line up of key events of ECB ISM and NFP.

Confederation of British Industry said that UK's conditions still remain rough but "there are signs of some improvement expected in the coming months." However, Profits, employment and investment remain "on a downward trend," and financial services companies cut about 17,000 jobs in the first quarter and probably shed 15,000 in the second quarter.

On the data front, New Zealand trade surplus jumped by largest level in history from 319M to 858M in May. Japan industrial production rose 5.9% mom in May and retail sales dropped -2.8%. Eurozone confidence indicators are the main focus today.

AUD/USD Daily Outlook

Daily Pivots: (S1) 0.8036; (P) 0.8061; (R1) 0.8099; More.

AUD/USD's retreat from 0.8086 extends further today and with 4 hours MACD dragged below signal line, an intraday top should be in place. Outlook is turned neutral for the moment. On the downside, below 0.7931 will suggest that rebound from 0.7780 has completed and will flip intraday bias back to the downside. Further break of 0.7788 support will revive the case that AUD/USD has already topped out and should target 0.7267 support for confirmation. On the upside, however, above 0.8086 will indicate that rise from 0.7780 is still in progress. Break of 0.8236/8262 resistance zone will confirm that recent rise has resumed for 61.8% retracement of 0.9849 to 0.6008 at 0.8382. But after all, AUD/USD should start continue to lose momentum on next rise and finally bring reversal after meeting 0.8382.

In the bigger picture, AUD/USD price actions from 0.6008 are treated as correction to down trend from 0.9849 only and has already met target zone of 0.7802/0.8519. Focus remains on reversal signal as AUD/USD stays in this range. While another rise cannot be ruled out for the moment, strong resistance should be seen as AUD/USD approaches 0.8519 resistance and bring reversal eventually. On the downside, break of 0.7788 support will now be an important signal that whole correction from 0.6008 has completed and will turn focus to 0.7267 key support for confirmation.

However, note that sustained break of 0.8519 resistance will seriously dampen this view and argue that the sharp decline from 0.9849 to 0.6008 was indeed a correction to long term rally from 0.4773 to 0.9849 only. And in such case, stronger medium rise could then be seen to retest 0.9849 high.

Economic Indicators Update

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