FOREX, COMMODITIES & STOCKS OUTLOOK 27th August 2010

Dealers’ Market Commentary
Overview
Following falls seen on Wall Street overnight, the Nikkei was off to a very weak start, falling close to 1%. Gapping down to open at 8811.47, it edged down a bit more to 8810.46 before bouncing. The Dow yesterday closed below the psychologically important 10k level for the first time since July 6. The relatively safe-haven USD often benefits when US equity prices weaken (and vice-versa).

Currencies
EURUSD:
Traders say they are happy to fade strength and/or weakness in the EUR/USD ahead of the US Q2 GDP and Bernanke’s speech at Jackson Hole, Wyoming later today. There is talk of good selling interest around 1.2750 while buyers are lined up around 1.2660. Stops are below 1.2650 and above 1.2770, but traders doubt they will get triggered ahead of the key events. The market is looking for the Q2 US GDP to be revised from the original estimate of plus 2.4% to 1.4%. Some analysts feared the revision could be more severe and perhaps below 1.0%. Unless the GDP comes in well outside expectations, the main event is likely going to be Bernanke’s speech. The Fed chairman has not spoken since the Fed decided to maintain their balance sheet size and buy US Treasuries with maturing mortgage bonds. There is speculation Bernanke may communicate further steps the Fed might take, which includes actually expanding the Fed’s balance sheet, which would be USD-negative. The EUR/USD trades 1.2601/06

GBPUSD:
Cable has broken below the base of its narrow 1.5515-1.5535 Asian session range in early European trade, with Ed Balls warning that an economic “hurricane” is heading towards the UK (FT website) helping weigh. Balls, an outsider in the Labour leadership contest, was the right-hand man of former PM Gordon Brown. Sell stops were tripped after the break below 1.5507 (yesterday’s Asian session base).
Bids are tipped at 1.5450/60 (1.5467 was yesterday’s early Asian session low), with further sell stops touted below 1.5450. 1.5535+ offers are touted at 1.5560, with buy stops pegged above 1.5580 and 1.5600 (1.5599 was yesterday’s low).

USDJPY
The press conference to be held by Japanese PM Kan later today on FX and fresh economic steps looks to have caused more USD/JPY and JPY cross shorts to cover. USD/JPY has seen further legs up in afternoon trading, moving up to 84.78 and levels seen yesterday. With the Ichimoku tenkan line at 84.74, it will be interesting to see if 84.78 is the extent of the USD/JPY upside. Offers trail higher well into the 85-handle but stops are mixed in above 85.00, and these could again come into focus. The Nikkei has rebounded as JPY pulled back. Stock market strength, in turn, looks to be shoring up the JPY pairs. JGB yields, on the other hand, have rebounded strongly and especially in the long-end as the yield curve steepens. The yield on the 20s has jumped 9.5 bps today, the biggest one-day rise in 22-months. Above 85.00, USD/JPY sees resistance at 85.15-20 and then 85.65-70, 85.19 and 85.68 the highs seen Tuesday and Monday, respectively. USD/JPY trades 84.69/71. The early low was 84.27. Earlier today Bloomberg put out a technical comment citing comments from a Mizuho analyst that USD/JPY could decline to sub-70. Though shrugged off by most, the article has received some attention.

AUD/USD: Markets await election this weekend and possibility of “Hung Parliament”
AUD/USD is clawing its way higher in mid afternoon trade as the so-called”risk” complex of trades continue an impressive recovery of todays lows ahead of the Jackson Hole symposium tonight. AUD/JPY is up nearly 1.0% off its lows but this move is mostly down to USD/JPY which has reversed sharply since the feeble attempt at the downside this morning. There is nothing much in the running commentary out of Japan but it appears players are taking no risks ahead of the weekend. EUR/USD is also have another stab at the topside, helped along by the EUR/JPY which is also up nearly 1.0% from its earlier low. AUD/USD last trades at 0.8872.
Commodities
Oil
Crude oil traded near a six-week low as rising U.S. jobless claims and a contraction in manufacturing added to concern growth in the world’s biggest oil-consuming nation is slowing. Oil, down 1.3 percent this week, fell yesterday after the Labor Department said weekly claims for unemployment benefits climbed to the highest level since November. The Federal Reserve Bank of Philadelphia’s general economic index dropped to the lowest reading since July 2009. Total U.S. petroleum inventories reached the highest in at least 20 years, Energy Department data showed earlier this week. Crude for September delivery was at $74.42 a barrel in electronic trading on the New York Mercantile Exchange, up 2 cents, at 0545GMT. The contract expires today. Yesterday, it fell 99 cents, or 1.3 percent, to $74.43, the lowest settlement since July 7. The more actively traded October contract was up 3 cents at $74.80. Futures are set for a second weekly drop. Oil, which topped $87 a barrel in early May, has fallen 6.2 percent this year amid concern the slow pace of economic growth would curb the global recovery in fuel demand. U.S. total petroleum stockpiles climbed 5.3 million barrels to 1.13 billion in the week ended Aug. 13, the highest level since at least 1990, an Energy Department report showed Aug. 18. Oil may fall next week on signs the U.S. economic recovery is slowing, bolstering stockpiles, according to a Bloomberg News survey. Seventeen of 44 analysts and traders, or 39 percent, forecast crude will decline through Aug. 27. Fourteen respondents, or 32 percent, predicted futures will increase, and 13 said there would be little change. Last week, 56 percent of survey respondents projected a drop.
Gold
Gold, trading little changed, may extend gains and approach a record as investors step up purchases to protect their wealth amid concern that the global economic recovery is faltering. The metal touched a seven-week high yesterday and is headed for a third weekly climb, the best run since June, when the price surged to an all-time high. Holdings increased in the SPDR Gold Trust, the biggest exchange-traded fund backed by bullion. The price jumped to $1,237.50 yesterday after U.S. jobless claims climbed. That was the highest intraday level since July 1 and compares with the June 21 peak of $1,265.30. Many believe that the gains on Gold will continue into next week. Initial U.S. jobless claims in the week to Aug. 14 jumped to the highest level since November, Labor Department data showed, while manufacturing in the Philadelphia region shrank for the first time in a year. Asian equities declined today. Gold has climbed 12 percent this year, heading for a tenth annual gain and outperforming equities, on signs that global growth may be losing momentum. December-delivery futures dropped 0.1 percent to $1,234.30 an ounce on the Comex in New York. Holdings in the SPDR Gold Trust gained 3.95 metric tons to 1,299.47 tons as of Aug. 19, according to the company’s website. Holdings are 1.6 percent less than of June’s record.
Markets
US Markets
The frail U.S. economy received fresh setbacks as new U.S. jobless claims scaled a nine-month high last week and Mid-Atlantic manufacturing shrank in August for the first time in more than a year. Other data released on Thursday, including a lackluster gain in a gauge of future activity last month, also implied that expansion had lost momentum after a brisk first quarter, though economists cautioned against interpreting the reports as signs of an impending double-dip recession. Initial claims for state unemployment benefits increased 12,000 to a seasonally adjusted 500,000 last week, the highest since mid-November, the Labor Department said, and the third straight week of gains — a trend last seen in January. Financial markets had expected claims to slip to 476,000. Separately, the Philadelphia Federal Reserve Bank said its business activity index dropped to minus 7.7, the lowest since July 2009, as new orders and shipments fell and the employment situation deteriorated. The index was at 5.1 in July and August’s fall confounded markets that had expected a rise to 7.0. It also raised the risk of contraction in overall national manufacturing activity, which has been leading the economy’s recovery from its most painful recession since the Great Depression of the 1930s. Stocks on Wall Street tumbled and the broader Standard & Poor’s 500 index suffered its lowest close in nearly a month. U.S. government debt prices rallied, with the yield on the two-year Treasury note falling to a record low. Bond yields move inversely to prices. The U.S. dollar fell to a near 15-year low against the yen but rose against the euro. The latest data, including a third report showing the Conference Board’s index of leading economic indicators rose 0.1 percent in July after dropping 0.3 percent in June, reinforced signs of sluggish third-quarter growth. The economy’s poor health, characterized by a 9.5 percent unemployment rate, has handed President Barack Obama a tough challenge and put at risk the Democratic Party’s majorities in the U.S. House of Representatives and Senate in November’s congressional elections. Obama on Thursday cited the weak data as he implored the Senate to pass a stalled bill to help small businesses, which have been hit hard by tight access to credit.”They need help and if we want this economy to create more jobs more quickly we need to help them,” Obama said.

European Markets
European shares are expected to fall for a third straight day on Friday, with sharp declines in Asia and on Wall Street following disappointing U.S. economic data seen prompting investors to stay cautious in holiday-thinned trade. Financial bookmakers predicted Britain’s FTSE 100 to open 5 to 8 points lower, or as much as 0.2 percent; Germany’s DAX to open 9 to 20 points down, or as much as 0.3 percent, and France’s CAC-40 to fall 11 to 12 points, or as much as 0.3 percent down. U.S. stocks tumbled to their lowest close in nearly a month on Thursday, while the FTSEurofirst 300 index of top European shares fell 1.5 percent to 1,036.84 points, the lowest close since July 21. Volumes on the index were 70 percent of its 90-day daily average.
Asian Markets
Following falls seen on Wall Street overnight, the Nikkei was off to a very weak start, falling close to 1%. Gapping down to open at 8811.47, it edged down a bit more to 8810.46 before bouncing. It was on its way down again before news that Japanese PM Kan will be holding a press conference later today to address JPY strength and economic weakness hit the wires. JPY sold off almost immediately and this helped stocks bounce. A high of 9021.75 was seen prior to the TSE close. Asian bourses in general followed the Nikkei higher from early lows though some remain in negative territory.

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