Daily Report: Yen Extends Rally on Risk Aversion, Sterling Weighed Down by Weale's Comments

Dollar and yen are broadly higher on broad based weakness in Asian equities where Nikkei dropped -1.33% to close below 9000 level at 8995. Meanwhile, crude oil also extends recent fall and breaches 83 level. Yen is even stronger as immediate intervention risk is cleared and is trading above last week's high against most major currencies except dollar and swissy. Dollar index extends recent rebound and is pressing 83.45 cluster resistance level for the moment. Sterling is so far the weakest one this week on pessimistic comments from new MPC member Weale.

 

The newest member of the Monetary Policy Committee of Bank of England Martin Weale said that the bank's growth forecast for 2010 and 2011 may be too optimistic and warned that UK faces risk of second recession. Weale said that the risks include another rise in unemployment, falling house prices and another banking crisis, "be a sovereign debt crisis or it could be a new liquidity crisis in the private sector." Technically, sterling is expected to head lower against dollar and yen and the upcoming fall could be steep. However, there is no sign of reversal in EUR/GBP yet. GBP/CHF is also still holding above 1.5825 support. So Sterling could still remain as the most resilient European majors.

 

On the data front, German Q2 GDP was unrevised at 2.2% qoq. BBA mortgage approvals and Eurozone industrial new orders will be released in European session. Canadian retail sales are expected rise 0.4% mom in June, with ex-auto sales up 0.1%. However, note that Canadian dollar will be vulnerable to downside surprises. US existing home sales is expected to drop sharply from 5.37m to 4.63m in July.

 

CAD/JPY finally builds up some downside momentum this week and is heading to 78.52/78.98 support zone. As noted before, whole medium term rebound from 68.38 should have finished at 94.46 already. Decisive break of 78.52/79.89 support zone will confirm this view. More importantly, CAD/JPY could then be resuming long term down trend from 2007 high of 125.52, targeting another low below 38.38 in medium term. In any case, we'll stay bearish in CAD/JPY as long as 83.48 resistance holds.

Dollar index's rise extends further to day and is trying to take out 83.45 cluster resistance (38.2% retracement of 88.70 to 80.08 at 83.37). Intraday bias remains on the upside and sustained trading above 83.45 will confirm that correction from 88.70 has completed at 80.08, and target rise to 61.8% retracement at 85.40 at least. On the downside, below 82.84 will turn intraday bias neutral. But outlook will remain bullish as long as 81.92 support holds.

GBP/JPY's fall from 137.75 resumes by taking out 131.96 and drops sharply to as low as 130.19 so far. The strong break of 130.82 support confirms our view that whole rebound from 126.73 is finished at 137.75 already. Intraday bias remains on the downside and further decline should be seen for 126.78 first. Break will confirm that whole decline from 163.05 has resumed for a retest on 118.81 low. On the upside, above 131.96 minor resistance will turn intraday bias neutral and bring recovery. But upside should be limited below 134.79 resistance and bring fall resumption.

 

In the bigger picture, GBP/JPY is still trending well below the medium term falling trend line from 163.05 and thus fall from there is still in progress for a test on 118.18 low. Break there will confirm that whole down trend from 2007 high of 251.09 has resumed for 61.8% projection of 215.87 to 118.81 from 163.05 at 103.06 next, which is close to 100 psychological level. However, note that sustained trading above the trend line (now at 137.78) will argue that fall from 163.05 is finished and turn focus to 145.94 for confirmation. Also, this will suggest that such fall is merely the second wave of the whole consolidation pattern from 118.81 and will bring another rise to 163.05 and above before resuming the longer term down trend.