Forex - USD Gains as Equity Markets Weaken

Forex News and Events: The USD was able to pick up some lost ground today, as risk aversion in equity markets lent the greenback some support. There was an article in the NY times, which reported that China is moving forward with levying tariffs on US automotive products and chicken meat, in response to President Obama's recent decision to levy tariffs on Chinese tire exports. The renewal of protectionism concerns between the US and China led to the overnight sell-off in risk correlated trades. The Nikkei was down -2.3% and S&P futures are pointing to a lower open. Gold and silver fell to $994.00 and $16.30, respectively. The USDJPY fell to 90.20 before rallying back to 90.70. Interestingly, the correlation between the JPY and equity markets continues to fall, while USD/JPY and DXY correlation has significantly increased. We expect that the recent JPY strength will force investors to consider the spillover effect to Japanese exporters’ earnings witnessed in today's Nikkei sell off. In the days to come, we believe Japanese policy markets will become increasingly vocal with their dissatisfaction. In this regard, traders will be specifically focused on Tuesday’s BoJ monetary policy meeting and the central bank’s accompanying statement. In addition, this will be the first BoJ meeting after the historic elections and the marginally independent CB might provide some direction for the young government. The other central bank meeting that traders will be watching, considering the recent currency strength, will be the SNB. Along with the JPY, the CHF has been one of the biggest gainers in recent weeks. We expect the SNB on Thursday to hold rates, but to once again affirm that CHF strength is unacceptable and halting further appreciation is at the top of their agenda. Today's Producer and Import prices came in at -5.5% vs. -5.4% y/y exp. If nothing else, they confirm Switzerland’s subdued inflationary trend and support the SNB fear that deflation remains a strong risk. The USD strength has been very apparent in the GBP, as markets speculate that the sterling is due for a correction. The Cable is now trading below its 5day MA at 1.6540. This should be an eventful week for the UK and sterling, as along the normal economic releases, Governor King and other MPC members are expected to testify to lawmakers on Tuesday and will be asked some very direct question of the future plans of QE. For the rest of the day, markets will be watching Capacity Utilization from Canada (USDCAD has found buyers briefly penetrating the 1.0990 psychological resistance), equity markets and a US Fed speakers.

Today's Key Issues (time in GMT): 09:00 EUR Industrial production, % m/m (y/y wda) Jul -0.3 exp, -0.3 (-16.7) prior 09:00 EUR Employment, % q/q ( y/y) Q2) -0.8 (-1.2) prior 09:45 EUR European Commission publishes economic forecasts 12:35 USD Fed Governor Duke (FOMC voter) speaks on regulatory perspectives in accounting 16:30 USD FRB of Richmond President Lacker (FOMC voter) speaks on "Choices in Financial Regulation" 17:00 GBP BoE Executive Director of Financial Stability Andrew Haldane speaks in Leeds 19:50 USD FRB of San Francisco President Yellen (FOMC voter) speaks on the economic outlook and monetary policy 23:01 GBP RICS housing market survey, price balance Aug -8.1 prior

The Risk Today: EurUsd Looking at the 4 hour chart we can see that the pair is getting rather extended and we have still not seen a retest of the 1.4445 breakout level. The pair is currently congested around one of the medium term uptrend channels at 1.4600, just above the support at 1.4570, but the RSI has been moving sideways throughout this entire move suggesting that a pullback is long overdue. Expect 1.4445 and 1.4381 to attract a fair amount of short covering and fresh buying from the USD bears. GbpUsd GBPUSD failed to advance above 1.6745 and currencly facing significant headwinds in overbought conditions. Pundents are calling for a complete meltdown but we need a break of 1.6530 trendline support and the focus will be on 1.6440 breakout level. UsdJpy Continued weakness in the pair has taken it to an extremely important support level at 90.20. The medium term uptrend channels are now completely wiped out so this support level will be the only thing for the long players to cling onto. A break here targets 88.60 which also coincides with one of the 2 year downtrend channels. Expect intraday short interest at 90.90 then 91.73. UsdChf The pair has been trading higher since the open off 1.0340 support. Mid term the trend is bearish but intraday we are seeing oversold conditions. Expect a period of consolidation before the SNBs meeting then focus will be on 1.0210.

Resistance and Support:

EURUSD	GBPUSD	USDJPY	USDCHF
1.4725	1.6900	92.47	1.0700
1.4684	1.6840	92.30	1.0550
1.4635	1.6750	91.80	1.0452
1.4552	1.6545	90.73	1.0400
1.4445	1.6480	90.10	1.0340
1.4405	1.6445	89.90	1.0264
1.4381	1.6365	89.20	1.0265
S: Strong, M: Minor, T: Trendline, K: Keylevel, P: Pivot