Sunrise Market Commentary

• Bond markets continue to thrive well
  Global bonds remained close to the highs, as Friday's profit taking in the US Treasury market got no follow through. There are no imminent dangers for the bond markets, but we become ever more cautious as a correction may be around the corner.
• Yen at key levels against the euro and the dollar
  Risk aversion and uncertainty on the pace of the global recovery continue to set the tone on the currency market. The yen is the big winner with USD/JPY and EUR/JPY close to/at multi-year lows. Global uncertainty continues to weigh on EUR/USD too.

The Sunrise Headlines

• US Equities reversed their opening gains, ending the session lower for a third consecutive day as fears about the economy overshadowed acquisitions news. This morning, most Asian shares trade lower led by the Nikkei (-1.3%), entering the bear market. Chinese stocks reversed their early losses.
• According to the WSJ, last Fed meeting was among the most contentious in Ben Bernanke's four-and-a-half year tenure as chairman as at least 7 of the 17 top Federal Reserve officials had reservations about the decision to buy more Treasuries.
• Pakistan started yesterday talks with the IMF in a bid to ease further strains in a financial rescue plan that had been struggling even before the country was hit by devastating floods.
• Britain faces the risk of sliding into recession and the central bank's growth forecasts for this year and next may be too optimistic, new Bank of England member Martin Weale said in an interview.
• Japan's government is closely watching market moves, including whether they are driven by speculators, Chief Cabinet Secretary Yoshito Sengoku said this morning as the yen edged near a 15-year high against the dollar.
• Chinese property developers are facing strained cash flows and will be forced to cut prices beginning in the fourth quarter, a state newspaper reported this morning.
• Crude oil ($72.76) fell for a fifth consecutive day on Monday to its lowest level in seven weeks as inventories remain at record high levels despite the peak driving season.
• Today, the eco calendar contains the euro zone industrial new orders, US existing home sales and Richmond Fed.

Currencies: Yen At Key Levels Against The Euro And The Dollar

EUR/USD

On Monday, EUR/USD trading developed initially in a tight intraday range close to the 1.27 mark. There was no big story to guide the price action. The August EMU PMI's declined slightly from the previous month, but the release was close to expectations. The impact on currency trading was close to non-existent. European equities started the week on a cautious footing, but regained some ground throughout the day. This 'improvement' in global sentiment on risk gave EUR/USD temporary downside protection. However, the positive momentum could not be maintained as US equities soon reversed early gains. This reversal had a knock-down effect on the EUR/USD cross rate, too. The pair closed the session at 1.2657, compared to 1.2712 on Friday evening.

Today, the eco calendar in the US and in Europe is moderately interesting. EMU industrial orders for the month of June are expected the confirm the positive trend of recent hard data, but such an outcome shouldn't be a big surprise for the (currency) market. In the US, the existing home sales and the manufacturing index from the Richmond Fed are expected in line with recent evidence of a slowdown in US economic activity. We expect these data series to be only of intraday importance. The impact on currency trading, if any, will most probably go via the reaction on the equity markets. Recently, EUR/USD has again become a risk trade, more or less mirroring the swings in global investor sentiment. As long as uncertainty on the slowdown in global economic growth persists, one might assume the EUR/USD unfriendly environment to remain in place.

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. Since early June, the impact from the EMU debt crisis on currency trading receded.

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 as markets started to consider that the Fed could even move to additional QE if the economic rebound would slow down further. 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 USD negative message from the Fed. However, the (currency) market played again another card after the Fed meeting. Global risk aversion came again to the forefront.

Risk aversion and uncertainty on the global recovery is apparently 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. At the end of last week, the euro felt additional headwinds as ECB's Weber said that the ECB should continue to provide full allotment of funds in its refinancing operations past end 2010. So, the EUR/USD currency pair is 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.

In medium term perspective, we have 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 consequence of additional loosening of monetary policy by the Fed. Short-term, the momentum is EUR/USD negative due to global uncertainty/ risk aversion. In a day-to-day perspective, there is no reason to fight this shortterm trend. So, for now a cautious sell-on-upticks approach is slightly preferred for the EUR/USD cross rate. We keep also an eye on the EUR/JPY cross rate. The pair hit a nine-year low this morning and sustained trading below the 107.30 area might trigger additional stop-loss euro selling.

From a technical point of view, the pair is currently retesting the 1.2670 neckline/break-up area. A sustained drop below this level would suggest that the current correction might still have some further to go.

EUR/USD: risk aversion weighs on single currency

Support comes in at 1.2644/21 (Weekly MTMA/Reaction low), at 1.2605 (50% retracement), at 1.2587/71 (Break-up/daily envelope) and at 1.2553/22 (Daily Boll bottom/ 13 July low).

Resistance stands at 1.2684/92 (Reaction high hourly/Daily envelope), at 1.2730/33 (Week high/STMA), at 1.2802 (Breakdown) and at 1.2881 (MTMA).

The pair is moving into oversold territory.

USD/JPY

On Monday, the yen remained well bid even as equities didn't do that bad during the morning session in Europe and early in the US. There was a lot of market chatter on a phone conversion between Japanese PM Kan and BOJ Governor Shirakawa. According to a spokesman, they exchanged views on the economic and financial situation including foreign exchange. However, they were said not to have discussed currency interventions. According to other sources, Kan didn't ask the BOJ to take additional steps of monetary easing either. This was a disappointment for yen bears, especially as stock market sentiment deteriorated later in US trading, too. USD/JPY closed the session at 85.16, compared to 85.62 on Friday evening.

This morning, risk aversion persists in Asian trade. The yen is at key support levels, both against the dollar and the euro. EUR/JPY touched a nine year low this morning. USD/JPY is with striking distance of multi-year low reached earlier this month (84.72).

Even as interventions were not said not to have been discussed at yesterday's phone conversation between PM Kan and BOJ governor Shirakawa, traders apparently are reluctant to push the EUR/JPY and USD/JPY cross rates below the key support areas. The pace of the rise of the yen is probably the key factor for Japanese authorities to step into the market. As long as the decline in USD/JPY develops in a very gradually way, we don't expect immediate BOJ action. However, a swift move toward the 80 area, if it were to occur, would change the picture. For now, there is no trigger available to bet on a change in the current environment on yen strength.

USD/JPY: testing multi-year lows

Support is seen at 84.72/61 (Year low + daily envelope/Daily Boll bottom), at 84.15 (Broken weekly Channel top since Aug 2008), at 83.71 (Irr B +daily Starc bottom) and at 82.41 (Irr B off 94.99).

Resistance comes in at 85.49 (MTMA + daily envelope), at 85.68/77 (Reaction high/ Weekly STMA), at 86.21 (Weekly envelope and at 89.69 (Daily downtrend line since 94.99).

The pair is in oversold territory

EURGBP

On Monday, there were no important items to guide sterling trading. Early in the session, sterling tried to extend its recent gains against the euro. However, the move had no strong legs and the pair settled in a tight sideways range roughly between 0.8175 and 0.8150. The pair closed the session at 0.8159 compared to 0.8183 on Friday evening.

Today, the BBA loans for house purchases are on the agenda. This is not a mover for currency trading. This morning, EUR/GBP jumped higher in Asian trade from the 0.8150 area to 0.8200 at the moment of writing. The move might have to do with a quote from new MPC member Weale in a newspaper saying that the UK economy faces a significant risk of sliding back into recession, even as a double dip was said not to be the BoE's core predication. Selling pressure from GBP/JPY through the crosses might have played a role too.

Since mid July, sterling had a good run against the euro. Recently, the move was supported by some encouraging UK eco data. However, the pair is gradually nearing the key 80.66 support area (year low). It's too early to draw conclusions from this morning's move. However, we would expect that some kind of high profile news is needed (from Europe or from the UK) for the pair to clear the 0.8066/00 barrier. Range trading in the 0.8066/85.30 trading range is preferred. EUR/GBP shorts can consider taking profit. We consider to buy in case of a move to the range bottom

EUR/GBP: decline to slow?

Support comes in at 0.8149/43 (Monthly Boll bottom/Reaction low), at 0.8137/35 (Break-up June/daily Boll bottom), at 0.8102 (Last target H&S off 83.17), at 0.8082 (Daily envelope), at 0.8066 (Year low).

Resistance is seen at 0.8228/31 (Weekly envelope/Breakdown hourly), at 0.8248/55 (Reaction high) and at 0.8297 (Breakdown daily).

The pair is in oversold territory.

News

EMU: manufacturing PMI falls back in August, but only moderately

In August, euro zone manufacturing PMI fell back after an unexpected improvement in July. The headline index dropped from 56.7 to 55.0, while only a slight decline (to 56.1) was expected. Both output and new orders weakened significantly, while employment stabilized. Services PMI on the contrary, surprised on the upside of expectations as the index fell only marginally (from 55.8 to 55.6). Services business expectations improved from 66.5 to 68.1. National details from France and Germany provided a mixed picture as German manufacturing PMI came out significantly weaker than expected, while services PMI rose to its highest level in three years. In France, manufacturing PMI surprised on the upside, while sentiment in the services sector came out weaker than expected. After a very strong second quarter, the recovery may slow somewhat in the second halve of the year, although growth is expected to remain on track. So, at least the August report doesn't feed expectations that the EMU economy is following the US pronounced growth slowdown.

European Commission's consumer confidence improved further in August, while an unchanged reading was expected. According to the advance estimate, consumer confidence improved from -14 to -11.7, the highest level since January 2008. Although the index is still significantly in negative territory, it is now slightly above the long term average (-12) and suggests domestic spending may play a bigger role in economic developments.

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