Sunrise Market Commentary

• Global bonds recoup all of Friday's substantial losses
  Strange session on Monday, as global bonds retraced all of Friday's losses and equities lost all of the gains. There was no noticeable news to explain these sharp moves. Bund tests contract high at onset of trading. The market calendar heats up today, but key eco data are scheduled for tomorrow and Friday.
• Risk aversion is back on the currency markets
  As was the case in other markets, most major currency cross rates reversed Friday's moves as the post-Bernanke optimism proved to be short-lived. EUR/USD turned south in step with equity markets. The results of the extraordinary BOJ meeting also failed to impress yen bulls as the Japanese currency is again close to multi-year highs against the dollar

The Sunrise Headlines

• Optimism after Bernanke's speech proved short-lived as US Equities reversed Friday's gains. The Dow/S&P fell by 1.4% led by financials. This morning, also Asian shares trade lower led by Japan.
• US President Barack Obama, who is under pressure to bolster the US economy, said yesterday he and his economic advisers were discussing additional steps to generate job growth such as more tax cuts for businesses.
• The ECB slowed its purchases of government bonds again, after a jump in the previous week, which some said was due to the bank buying Irish bonds to soothe market jitters.
• Japanese factory output edged up in July, but manufacturing activity in August expanded at its slowest pace in more than a year, suggesting that the export slowdown and strong yen is hurting companies.
• The IMF announced a new credit line designed to serve as a crisis insurance policy for pre-qualified countries that do not immediately need an emergency loan.
• British consumer confidence unexpectedly improved in August for the first time since February thanks to a more positive view on the economic outlook, a survey showed this morning.
• The yuan fell against the US dollar on Tuesday and is heading for its biggest monthly loss since its landmark 2005 revaluation as the People's Bank of China set a surprisingly low midpoint, signaling its determination to halt the yuan's appreciation after its de-pegging in mid-June.
• Today, the eco calendar contains the euro zone CPI inflation data, unemployment rate, US consumer confidence and the Chicago PMI. The Fed will release the Minutes of its latest FOMC meeting.

Currencies: Risk Aversion Is Back On The Currency Markets

EUR/USD

On Monday, there was no exciting story to tell on EUR/USD trading. Global markets failed to build further on the positive sentiment in the wake of Bernanke's Jackson Hole speech on Friday. This lack of follow-through price action on the equity markets also blocked any further directional moves in the major currency cross rates. EUR/USD drifted lower trough most of the session, reversing Friday's gains. Nothing more or nothing less. The eco data (EC confidence indicators in Europe; income and spending data in the US) were very close to market expectations and had no noticeable impact on (currency) trading. So, trade was flow-driven in thin market conditions. Later in the session, additional losses on the US equity markets continued to drag EUR/USD lower, too. The pair closed the session at 1.2663, compared to 1.27.63 on Friday evening. The least one can say is that the post-Bernanke optimism was very short-lived.

Today, the calendar heats up. In Europe, the EMU unemployment data (July) and the CPI will be published. One should also keep an eye on the timelier German labour market data (August). However, we doubt whether these data will have a lasting impact on global markets or on currency trading. In the US, the CS house prices, the Chicago PMI and the consumer confidence release will be published. Yesterday's price action and the performance of the Asian markets this morning obviously illustrates that risk aversion is back. The key question remains what this will mean for EUR/USD. Yesterday, EUR/USD trading again followed the paradigm that negative global sentiment should be seen as euro negative. However, last week negative news from the US sometimes also caused some dollar weakness across the board. So, the question is whether additional negative news from the US should be that bad for EUR/USD. Nevertheless, yesterday's price action suggests that any protracted EUR/USD rebound will be difficult unless global sentiment turns more constructive again

MT picture and technicals. From early June to early August, EUR/USD succeeded a remarkable rebound. This move was partly a technical correction on the steep sell-off of the euro in the previous months due the European government debt crisis. In addition, during June and July, European eco data came out reasonably good. At the same time, US data suggested a cooling down in the pace of the recovery in the US. Interest rate differentials between the US and Europe (Germany) turned sharply to the disadvantage of the US currency. EUR/USD reached a recovery high at 1.3334 early August, going into the Fed August meeting.At this meeting, Bernanke and Co admitted the slowdown in US growth and kept the door open for additional monetary stimulus (QE). Intrinsically, one would expect this to be a USD negative message from the Fed. However, the (currency) market played another card after the Fed meeting. Global risk aversion came again to the forefront and uncertainty on the global recovery was still seen a USD supportive factor, even as the negative surprises recently came from the US rather than from Europe. So, EUR/USD came off from the early August highs. Intra-EMU government credit spreads moving wider again was a negative factor for the euro, too. So, the EUR/USD currency pair was captured in a downward correction. This move is in the first place driven by global market sentiment rather than by the specific economic news flow from the US or Europe. Last week, the EUR/USD decline slowed.

In medium term perspective, we changed our bias on the USD from positive to neutral as the case for sustained dollar gains supported by a relative outperformance of the US economy has been postponed ‘until further notice'. The dollar is even at risk to suffer the consequences of additional loosening of monetary policy by the Fed. Short-term, the momentum was EUR/USD negative due to global uncertainty/ risk aversion. Until now EUR/USD failed to really profit from poor US eco data. Nevertheless, last week's price action suggested that the downside in EUR/USD was becoming less easy. This might partially be due to growing doubts on the dollar overall. In addition, Friday's price action showed that also a technical rebound on the equity markets is still possible as global investors at some point might come to the conclusion that enough bad news was discounted in current prices. Of course, yesterday's price action pointed again in another direction. The key US data that will be published from tomorrow on and, the a lesser extent the market reaction to the ECB policy meeting/press conference, might decide on the next big move in this cross rate. At least for now, it looks that EUR/USD will have difficulties to succeed a protracted rebound as long as negative sentiment on the equity markets persists.

From a technical point of view, EUR/USD failed to regain the 1.2732 resistance area (neckline H&S). This is a disappointment. Last week, we turned a bit more positive on EUR/USD even as we were well aware that the global context would remain shaky. Yesterday's price action of course raises questions on a more euro supportive sentiment. In the current environment with no clear theme to guide de price action, one can not but keep a close eye on the technical charts. The 1.2588 reaction low is the short-term line in the sand for EUR/USD bulls. A break below this level would suggest the risk of more stop-loss selling in this pair

EUR/USD: reversing Friday's post-Bernanke gains

Support comes in at 1.2616/08 (Daily envelope/Reaction low), at 1.2588 (Last week low), at 1.2552 (Weekly envelope), at 1.2522/22 (13 August/ Daily downtrend line) and at 1.2479 (reaction low).

Resistance stands at 1.2690 (Broken daily STMA), at 1.2716 (Reaction high), at 1.2733 (daily envelope + Neckline/MTMA), at 1.2780 (Reaction high) and at 1.2833 (Reaction high).

The pair is in neutral territory.

USD/JPY

On Monday, the focus for yen trading was on the consequences from the extraordinary BOJ meeting. At this meeting, the BOJ expanded a special funding operation supplying cheap fixed loans to banks. However, investors obviously considered this move as too little, too late. In any case, the measures were not able to support efforts from the Japanese government to slow the ascent of the yen. On the contrary, the move even turned out to be a bit contra-productive as the yen started to strengthen again after the announcement of the results of the BOJ meeting. The move was reinforced by the deterioration of global equity/investor sentiment in European in US trading. So, USD/JPY closed the session near the day lows at 84.62, compared to 85.22 on Friday.

This morning, a series of Japanese eco data came out (slightly) better than expected, but as usual these data had no lasting impact on markets. Asian stocks remain under downward pressure and this is bringing the yen close to multi-year highs against the dollar. Japanese Finance Minister Noda said again that the government would take decisive action on currencies when necessary. However, for now markets are not impressed. The key question of course remains what will be the line in the sand for the Japanese authorities.

Last week, we indicated that we didn't expect a sustained weakening of the yen as long as the global picture doesn't change. For that to happen, an improvement in global economic sentiment is needed. Recent price action looks like confirming this hypothesis. With respect to the Japanese side of the story, it is obvious that markets are not impressed by yesterday's BOJ action. So, the feeling was reinforced that the BOJ has not that much of ammunition to really turn around the course of events on the currency markets. The pace of a further rise of the yen will probably remain the key factor for Japanese authorities to decide whether they will step into the market. As long as the decline in USD/JPY develops in a gradually way, we don't expect immediate BOJ action. Only a swift move toward/beyond the 80 area, if it were to occur, would change the picture. So, for now we expect the current stalemate in USD/JPY to persist. We wouldn't be surprised to see USD/JPY being blocked at current levels for some time to come.

USD/JPY:BOJ emergency measures fail to change the course of events for yen trading.

Support is seen at 84.11 (Reaction low + Daily envelope/Boll bottom), at 83.89 (Reaction low, at 83.58 (year low), at 83.03 (Weekly Boll Bottom) and at 82.41 (Irr B). .

Resistance comes in at 85.92 (Reaction high), at 86.13/27 (Weekly envelope + LTMA/Daily downtrend line), at 86.49 (Boll Top), at 87.25 (Breakdown daily).

The pair is in neutral territory.

EURGBP

On Monday, sterling trading was mostly driven by external factors and technical considerations as UK financial markets were closed. A negative assessment of the BCC on UK economic growth was a good enough reason for sterling return most early gains against the euro. The EUR/GBP cross rate closed the session at 0.8190, compared to 0.8218 on Friday. . This morning, the UK Gfk consumer confidence unexpectedly rose from -22 to -18 while a slightly further decline was expected. Nevertheless, sterling failed to make any sustained gains against the euro on the back of this release. Later today, UK lending data are on the agenda. The data are interesting, but we expect them to be only of intraday importance, at best.

Since mid July, sterling had a good run against the euro. At the early August policy meeting, the BoE maintained a balanced approach. Inflation is expected to stay well above target in 2011 due to a new VAT hike. Nevertheless, the BoE still sees inflation returning slightly below target once this temporary factors are worked out. Dissenter Sentance got no support for his call for a rate increase. However, this rather soft message didn't prevent a gradual rise of sterling against the euro during the month of August.

Recently, the move was supported by some encouraging UK eco data. However, the pair is gradually nearing the key 0.8066 support area (year low). We hold on to our view that high profile news is needed (from Europe or from the UK) for the pair to clear the 0.8066/00 area. At this stage, we don't see this trigger. Recent price action didn't give a clear technical signal yet. Nevertheless, we have the impression that EUR/GBP has entered a consolidation pattern after the recent sterling gains/euro slide and that that the downside in the pair has become better protected. In a day-today perspective, a buy-on-dips approach is still slightly preferred, even as the picture for EUR/USD has turned less positive over last 24 hours.

EUR/GBP: consolidation

Support comes in at 0.8164/63 (Broken daily downtrend line/ Reaction low + Daily envelope), at 0.8157/52 (Reaction lows), at 0.8143 (Last week low), at 0.8122/02 (Boll bottom/Last target H&S off 83.17) and at 0.8067 (Reaction low).

Resistance is seen at 0.8218/21/36 Reaction high/ Weekly STMA +daily envelope), at 0.8263 (Reaction high) at 0.8248/55 (Reaction high) and at 0.8282/91 (Reaction high/38% retracement).

The pair is in neutral territory.

News

US: personal income and spending advanced in July

Both US personal income and spending rose in July after a flat reading in June. Personal income rose by 0.2%, which was slightly less than expected. Personal spending on the contrary, surprised on the upside of expectations rising by 0.4%, while an increase by 0.3% was expected. As a result, the savings rate dropped from 6.2% to 5.9%, but remains at elevated levels, which indicates that American consumers are cautious about the economic outlook and their own prospects. On the other hand, the high savings rate implies a progress in the repair of households balance sheets, which should allow households to increase their spending more rapidly as credit conditions ease and the overall economy improves, as Bernanke pointed out in his speech at Jackson Hole last Friday.

EMU: economic confidence surges to 2.5-year high

European Commission's economic confidence improved for the fourth consecutive month in August. Economic confidence rose from a downwardly revised 101.1 to 101.8, slightly above the consensus estimate. The details show an improvement in consumer (-11 from -14) and services (7 from 6) confidence, while business-, retailand construction sentiment stabilized. The business climate indicator, on the contrary, dropped marginally (to 0.61 from 0.63), while an improvement was expected. National data confirm the strong performance of Germany, while sentiment remains very poor in e.g. Greece.

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