Weekly Review and Outlook

"Weakness in Dollar;Strength in Yen"

Top 5	Current	Last	Change (Pips)	Change (%)
NZDUSD	0.7067	0.6869	+198	+2.80%
USDJPY	90.64	93.00	-236	-2.60%
USDCHF	1.0377	1.0604	-227	-2.19%
EURUSD	1.4575	1.4298	+277	+1.90%
GBPUSD	1.6673	1.6391	+282	+1.69%
Dollar
EURUSD	1.4575	1.4298	+277	+1.90%
USDJPY	90.64	93.00	-236	-2.60%
GBPUSD	1.6673	1.6391	+282	+1.69%
USDCHF	1.0377	1.0604	-227	-2.19%
USDCAD	1.0765	1.0880	-115	-1.07%
Euro
EURUSD	1.4575	1.4298	+277	+1.90%
EURGBP	0.8741	0.8721	+20	+0.23%
EURCHF	1.5126	1.5163	-37	-0.24%
EURJPY	132.11	132.98	-87	-0.66%
EURCAD	1.5689	1.5554	+135	+0.86%
Yen
USDJPY	90.64	93.00	-236	-2.60%
EURJPY	132.11	132.98	-87	-0.66%
GBPJPY	151.12	152.43	-131	-0.87%
AUDJPY	78.25	79.08	-83	-1.06%
NZDJPY	64.06	63.89	+17	+0.27%
Sterling
GBPUSD	1.6673	1.6391	+282	+1.69%
EURGBP	0.8741	0.8721	+20	+0.23%
GBPCHF	1.7300	1.7381	-81	-0.47%
GBPJPY	151.12	152.43	-131	-0.87%
GBPCAD	1.7947	1.7833	+114	+0.64%

The most interesting development last week was the persistent weakness in dollar and strength in yen. A couple of factors sent the greenback broadly lower with dollar index making another low in 2009. Gold completed a brief pull back and broke prior 2009 high of 1007.7 to 1013.7. Dollar became the cheapest funding currency after three month libor dropped to a record low on Wednesday, below that of Swiss Franc for the first time since last November. United Nations panel called for dollar reserve role to be eliminated. World Economic Forum downgraded US from the most competitive economy in the world to second behind Switzerland.

While US stock markets made new highs last week and rebound in emerging market stocks continued, it's believed that the Japanese yen benefited from funds flowing back to "safer assets" towards the end of the week. This view is supported by the fact that commodities, except precious metals, reversed sharply on Friday. CRB index rebound to as high as 256.33 but then closed sharply lower at 251.12. Yields on 10 year note dropped to new low of 3.272 before closing at 3.343, indicating strength in the bond markets. Yen was also boosted by the fact that 3-months Libor of major currencies dropped to new record low last week, including Sterling, Euro and dollar.

The economic calendar was relatively light last week with main focus on central banks. BoE left rates unchanged at 0.50% and also kept the asset purchase program unchanged at GBP 175b. BoC left the overnight rate unchanged at 0.25% for the fifth month. The central bank reiterated that 'conditional on the outlook for inflation, the target overnight rate can be expected to remain at its current level until the end of the second quarter of 2010 in order to achieve the inflation target. ' Nevertheless, BoC policy makers turned more confident in the economic outlook and viewed the threat posed by strength in Canadian dollar as less severe than previously projected. RBNZ left the OCR unchanged at 2.5% and maintained a dovish tone and easing bias in the accompanying statement. Regarding economic outlook, the central bank revised upward its forecasts on both domestic and global growth.

Fed's Beige Book said that "economic activity continued to stabilize in July and August" and outlook in most districts are cautiously positive. While the job markets are still weak, several districts noted an upside in temporary hiring and a drop in pace of layoffs. Outlook in manufacturing activities were somewhat upgrade from being subdued to cautiously optimistic with modest improvements.

Other important economic data saw US trade deficit widened sharply to -23b in July with strong gains in import and export. University of Michigan consumer sentiment rose strongly to 70.2 in September. UK industrial production and manufacturing productions rose strongly by 0.5% mom, 0.9% yoy in July. consumer confidence rose to 63 in August. PPI input rose more than expected by 2.2% mom in August while PPI output rose less than expected by 0.2% mom. Japanese Q2 GDP was revised down to 0.6% qoq, 2.3% annualized. Australia retail sales unexpectedly dropped -1.0% mom in July. Job markets contracted by -27.1k in August but unemployment rate was unchanged at 5.8%.

As mentioned above, the developments in the financial markets last week argue that investors are moving away from risks, pocketing the profits made earlier this year rather than seeking risks even though US stocks did made new highs. Also one must note that S&P 500 is now 57% above March's, while high yield currencies like Aussie is also 44% above last October's low. Some corrections in these markets are overdue.

Looking at the charts, S&P 500 rose to new high of 1048.18 last week. However, upside momentum is somewhat diminishing with bearish divergence conditions in hourly MACD. Daily MACD is also still in down trend. Similar situation is also seen in DOW.

Another sign of reduced demand for riskier assets was seen in commodities. CRB index rebounded strongly from 246.74 to as high as 256.33 last week. But such rebound was short lived and the CRB index reversed sharply on Friday to close at 251.12. The single day reversal after hitting near term channel resistance argues that CRB index's fall from 269.18 is still in progress and a new low will likely be seen in near term.

Sign of investors seeking safe assets could be found in bonds. Yield on 10 year notes rebound to 3.535 last week but was limited by 55 days EMA and then dropped through prior low of 3.293. Treasury yield is vulnerable to another fall which would pressure USD/JPY and other yen crosses much.

Also, the yen continued to lose its appeal as the funding currency on the back of falling borrowing costs of other major currencies. Three month Libor of dollar dropped to record low of 0.2987 before closing the week at 2.990. Three month Libor of Euro and Sterling dropped throughout the week and closed at record low of 0.7319 and 0.6269 respectively.

Dollar continued to feel the pressure by rally in Gold last week. Gold had a brief consolidation but then resumed recent rise to as high as 1013.7. We're still favoring some more upside in gold to 1033.9 high at least which will give some short term pressure to the greenback.

Crude oil drew some support from medium term rising trend line and and rebound to as high as 72.90. The development raised some hope that the medium term rally from 33.2 was still in progress for a new high above 75.0. But such expectation was dampened by the sharp reversal on Friday that sent crude oil lower to close at 69.12. It looks as if crude oil is forming a small head and shoulder top.

After all, the Japanese yen will likely remains strong this week on the back of falling treasury yields, commodities and Libor. USD/JPY will probably continue to be the weakest yen related pair as the greenback is pressured by rally in gold and stocks. However, in case of pull back in the precious metal or US stocks, the greenback will reverse its fortune and starts to outperform other major currencies. In such case, high yielding yen crosses will be the major victims on risk aversion.

Looking at the dollar index, the break of 77.43 last week confirmed fall resumption index then dropped to as low as 76.47. initial bias remains on the downside this week and further fall could be seen to next key support level at 75.89. However, there is no change in the view that the current decline is the fifth wave of the five wave sequence that started in March at 89.62. Hence we'd expect strong support from around 75.89 level to conclude the fall and at least bring sizeable short term rebound. Break of 78.93 resistance will be an important signal that the index has bottomed out. However, note that sustained trading, with a weekly close, below 75.89 support will dampen this view and open up the case for further down trend to key support level around 70.

Currency Heat Map Weekly View

	USD	EUR	JPY	GBP	CHF	CAD	AUD
USD
EUR
JPY
GBP

The Week Ahead

The markets will be dominated by a string of important economic data from US and UK this week, together with BoJ and SNB meetings. US data are anticipated to show more evidence of recovery in the economy and the expectations are high. Strong gains are expected in retail sales, regional Fed survey from New York and Philadelphia. Meanwhile, housing data are expected to show further sign of improvements. Consumer and producer inflation are both expected to show gains too. A number of policy makers are also scheduled to speak in the early part of the week including Duke, Lacker, Yellen and Bernanke.

From UK, however, headline and core inflation are both expected to slow further away from BoE's target range in August. Job report is expected to show further rise in unemployment rate to 8.0%. Though retail sales is expected to show modest gain.

SNB is widely expected to keep rates unchanged at 0.25%. The main focus will indeed be on any comments related to intervention. 1.50 in EUR/CHF is believed to be the magic number that will trigger intervention from SNB. BoJ will keep rates unchanged at 0.10% and could be a non-event.

Important events and economic data to be released this week include:

• Monday: New Zealand Retail Sales; Swiss PPI
• Tuesday: RBA minutes; UK CPI; German ZEW; US retail sales, PPI, Empire State manufacturing
• Wednesday: RBA annual report; Swiss retail sales, ZEW; UK job report; Eurozone CPI; US CPI, current account, TIC capital flow, industrial production, NAHB housing market index
• Thursday: BoJ rate decisions; UK retail sales; Eurozone trade balance; Canadian CPI; SNB rate decision; US housing starts, Philly Fed survey
• Friday: Eurozone current account, Canadian wholesale sales

USD/JPY Weekly Outlook

USD/JPY dropped sharply to as low as 90.20 last week and the break of 91.73 low confirmed that whole fall from 101.43 has resumed. Initial bias remains on the downside this week and further fall should be seen to lower channel support at 89.92 next. On the upside, above 91.22 minor resistance will bring consolidations first. But upside is expected to be limited by 91.94/93.29 resistance and bring fall resumption.

In the bigger picture, on the one hand, USD/JPY is still trading well below 55 weeks EMA and the long term falling trend line resistance The lower highs, lower lows pattern since 2007 high of 124.13 is still intact. Weekly MACD is also staying negative. On the other hand, the choppy look of the fall from 101.43 so far argues that it's corrective in nature and thus suggests that rise from 87.12 is still in progress. The conflicting indications keep medium term outlook mixed and question remains on whether USD/JPY has bottomed out at 87.12 already.

Focus is now on the lower channel support of the falling channel from 101.43. Sustained break there will indicate that the fall from 101.43 is accelerating which in turn argues that such fall is developing into an impulse. In other words, fall from 101.43 is part of the whole down trend from 124.12 and should extend beyond 87.12 low. On the other hand, while strong rebound from the channel support isn't a adequate signal of reversal, it will add more favor to the case that fall from 101.43 is merely a correction. Break of 97.77 resistance will further affirm the case that USD/JPY has bottomed out at 87.12 already.