Daily Report: Risk Aversion Back as Stocks Tumble on Recession and Deflation Worry

The Japanese yen strengthens sharply today as risk aversion is back in the markets following late selloff in the US stock markets. S&P 500 tumbled to 5 year low at 806 while DOW is back below 8000 level. The selloff continues in Asian stock markets with Nikkei down over 6% to below 8000 again. Investors are clearly continued on recession and deflation risks in the US and the worry intensified after Fed released downgraded projections with the FOMC minutes yesterday. Markets were also disappointed as lawmakers deadlocked on the bailout plan for the Big Three automakers in US.

Here is a summary of the latest projections from FOMC.

Technically speaking, dollar index's consolidation from 87.98 should have completed after yesterday's dive to 86.14 and recent rally is set to resume towards next key level at 92.63. USD/CHF's recent rise is still progress despite yesterday's sharp but brief pull back. USD/CAD's rise resumed last week by taking out 1.2445 and is set to test 1.3015. AUD/USD's break of 0.6340 minor support suggests that recent fall from 07014 is resuming towards 0.6008 low. EUR/USD, on the other hand is still bounded in range and focus will turn to 1.2309 minor support in near term.

As weakness in stock markets is set to continue in near term, the Japanese yen will likely continue to be boosted. We're expecting major stock index around the world to retest Oct's low, i.e. 6995 in Nikkei, 7884 in DOW and 3665 in FTSE. Yen crosses will likely follow to retest Oct's low too. Crude oil will also remain pressured by bearish sentiments in the markets and could extend recent weakness to 50.

On the data front, Japanese trade balance turned deficit again to -63.92b in Oct. Main focus in the European session will be UK retail sales which is expected to contract -0.9% mom in Oct with yoy rate down from 1.8% to 1.4%. US jobless claims is expected to remain above 500k level. Philly Fed index is expected to improve mildly to -35 in Nov.

USD/JPY Daily Outlook

Daily Pivots: (S1) 95.19; (P) 96.17; (R1) 96.68; More.

USD/JPY's break of the intraday trend line support with 4 hours MACD dragged down signal line argues that fall from 100.54 might be resuming. Intraday bias is now mildly on the downside and near term focus is turned to 94.47 minor support. Break will confirm this scenario and bring deeper fall to retest 90.92 low first. On the other hand, above 97.13 minor resistance will revive the case that rebound from 90.92 is still in progress for 100.54 or above before completion.

In the bigger picture, as long as 103.06 cluster resistance holds, medium term outlook remains bearish. Prior break of 95.77 low confirms that whole down trend from 124.13 has resumed and should target 100% projection of 124.13 to 95.77 from 110.66 at 82.3 next. Also, note that the current development clears out the long term picture too. Price actions that started from 79.75 (95 low) has completed in form of a triangle that ended with five waves to 124.13. In other words fall from 124.13 is just part of an even larger scale down trend which could extend further to retest 79.75 low.

On the upside, sustained break of 103.06 cluster resistance will firstly argue that fall from 110.66 has completed. Secondly, it will also argue that a medium term low is in place at 90.92 and outlook will be turned neutral with focus back to 110.66 high.

Forex News Digest

• The Day Ahead U.S. and Canada: U.S. Jobless Claims, Philly Fed, Paulson to Speak
• The Day Ahead UK & Europe: GE Producer Prices, IT Industrial Orders, UK Retail Sales
• U.S. Preview: Weekly U.S. Jobless Claims to Remain Above 500k
• U.S. Preview: Philly Fed Manufacturing to Remain at 18-Year Low
• Japan's Surprise Deficit Result of Global Slump, Slowdown in Asia, Economists Say
• Japan Unexpectedly Posts Trade Deficit in October
• S&P 500 Falls to Lowest Level Since 2003
• FOMC's Minutes from Oct. 29 Meeting Show Outlook Worsening Dramatically (Update)
• Yen Rises on Speculation Traders Sold High-Yielding Assets on Stock Slump
• Australian, New Zealand Dollars Slide Most in Week as Risk Aversion Grows
• Bernanke May Find Deflation `Back on the Table' as Threat to U.S. Economy
• Fed to Cut Rates to Zero in January on Deflation Risk, JPMorgan Predicts
• GM, Ford, Chrysler Leave Congress Empty-Handed After Rescue Plea Hearings
• Asian Currencies Drop, Led by Korean Won at Decade Low, as Equities Slide

More Forex News

Economic Indicators Update

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