Mid-Day Report: EUR/USD Breaks 1.3 on China, USD/JPY Makes New 2010 Low

While the worst of Eurozone debt crisis seems to have past, Euro is further boosted by China Premier Wen Jaibao's comment that Europe is a major market for China to invest its foreign-exchange reserves. In additional. China and Germany Signed 10 agreements that worth at least $4.4b in Beijing to build a "comprehensive strategy partnership". Euro is broadly strong, along with yen, and strengthens against dollar, sterling as well as commodity currencies. EUR/USD breaches 1.3 psychological level briefly and is set to extend towards 1.31 cluster level later in the month. EUR/GBP also breaks last week's high of 0.8418 level to resume the rally from 0.8067 towards 0.86 medium term resistance level.

The Japanese yen is also exceptionally strong and the rally against dollar accelerates after USD/JPY takes out 86.96 support. The Japanese yen is somewhat helped by funds flowing out of risky assets and dollar. NZD/JPY continues to be the top loser today, dropping -2.2%.

On the data front, US CPI unexpectedly dropped -0.1% in June with yoy rate moderated sharply from 2.0% to 1.1%. Core CPI rose slightly more than expected by 0.2% mom and yoy rate was unchanged at 0.9%. Canada leading indicators rose 1.0% mom in June. Eurozone trade deficit came in at EUR -3b. New Zealand CPI released overnight missed expectation and rose 0.3% qoq only, while yoy rate moderated to 1.8%.

On key development in the markets is Gold on Euro. XAUEUR broke 937.34 yesterday and the fall accelerates today to as low as 915 so far. We maintain our view that medium term correction from 1051.1 is still in progress and should head towards 900 psychological level at least, 38.2% retracement level. Gold's decline will probably be spread over to commodity currencies as well as dollar later in the month.

USD/JPY Mid-Day Outlook

Daily Pivots: (S1) 86.91; (P) 87.71; (R1) 88.18; More.

USD/JPY's break of 86.96 confirms that whole decline from 94.97 has resumed. Intraday bias remains on the downside and we'd expect further decline to 84.81 low next. On the upside, above 87.36 minor resistance will turn intraday bias neutral first. But we'd expect recovery to be limited below 89.14 resistance and bring another fall.

In the bigger picture, the break of 88.13 support confirms that medium term rebound from 84.81 has completed with three waves up to 94.97 already. The corrective structure in turn indicates that whole down trend from 2007 high of 124.13 is still in progress. Retest of 84.81 should be seen next and break will confirm down trend resumption for next key level of 79.75 (1995 low). On the upside, break of 94.97 resistance is needed to be the first sign of medium term reversal. Otherwise, we'll stay bearish.

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