Dow Jones Newsletter 25th Aug

THURSDAY, AUGUST 25, 2011

ifcmarkets INTRADAY SNAPSHOT EUR/USD The pair stands above its support and should post a rebound. Suggests long positions above 1.4375, with 1.4450 and 1.4480 in sight. The downside penetration of 1.4375 will call for 1.4345 and 1.4325. GBP/USD The pair stands below its new resistance and remains under pressure. Suggests short positions below 1.6425, with targets at 1.6350 and 1.6325. The upside penetration of 1.6425 will call for 1.6475 and 1.6525. USD/JPY The pair has rebounded on its new support, the RSI is supported by a rising trend line. Suggests long positions above 76.70, with 77.25 and 77.5 as next targets. The downside penetration of 76.70 will call for 76.45 and 76.20. AUD/USD The pair has just broken below its rising channel. Suggests short positions below 1.0535, with targets at 1.0390 and 1.0315 in extension. Above 1.0535 look for further upside, with 1.0600 and 1.0680 as targets. ifcmarkets FOCUS If politicians have been bad news for the euro then the lawyers are going to be even worse. At every juncture there appear to be legal blockages to Germany's participation in the bailouts for the peripheral debtors of the euro zone. And now, German President Christian Wulff is questioning the legality of the European Central Bank's bond-buying efforts that have been helping to prevent Italy and Spain from going broke. Without the ECB's purchases and without German participation, these and other euro-zone peripherals would have long gone bust and the single currency itself would have fallen apart. But, that doesn't mean it still can't happen. To look at the euro's rock steady performance over the last few weeks, these fears are hardly evident. But, if you look closer at how investors are quietly choosing their options in these quiet summer months, the picture is somewhat different. Risk reversals, which essentially reflect the direction of a currency's expected move, have risen to record levels skewed on the basis that the euro is going to fall against the dollar. This shouldn't be such a surprise to those who have been tracking political and legal developments in Germany, where Chancellor Angela Merkel's political career is on the line. Take the European Financial Stability Facility. This is the key fund through which richer nations, like Germany, can provide their funds to the poorer nations, like Greece, through bailouts. For a start, the EFSF is seen as far too small to be able to bail out a major debtor such as Spain or Italy, much less both. But even so, it is still not clear that Germany can participate, even without an increase. A constitutional court in Karlesruhe won't rule on this until September 7th. Of course a negative ruling would lead to paralysis. But, there is also a chance that while the court will allow participation in the EFSF, it will increase parliamentary control over payments and even limit the time over which they can be made just when a more long-term solution to the debt crisis is needed. In other words, Merkel will have less power to broadcast German largesse and running to the aid of failing peripheral nations will be even more difficult. EUROPE Currency markets treaded water in European trading hours Thursday with traders nervous about putting on new bets ahead of Federal Reserve Chairman Ben Bernanke's speech at the central bank's gathering in Jackson Hole Friday. Short-term dips and rallies in the euro, and in the commodity-linked currencies of Australia, New Zealand and Canada quickly evaporated. Expectations that Bernanke will announce additional monetary easing have been scaled back of late, but currency traders are still shying away from placing large bets until the event passes as they puzzle over which of the major currencies to buy or sell. As a result, subdued trading is likely to prevail with currencies holding tightly within recent ranges, market participants say. "There seems to be a distinct lack of appetite in foreign-exchange to break near term ranges ahead of the Jackson Hole confab, where expectations for substantive liquidity measures have been whittled down in the past 30 hours," said Sue Trinh, a senior currency strategist at RBC Capital Markets. This left the bond markets to take the strain as the drumbeat of unnerving news about the euro-area debt crisis continued. ASIA The dollar gained slightly on its counterparts in Asia Thursday, supported by growing speculation that Federal Reserve Chairman Ben Bernanke likely won't pledge any additional monetary easing in a speech at the central bank's gathering in Jackson Hole Friday. Some observers say the fact that Bernanke has not said anything to encourage the view that he will signal further action highlights the unlikelihood of such a move. A Wall Street Journal report said Bernanke's aides have also been quiet on the subject. "This makes sense when you consider that in its meeting just a few weeks ago the Federal Open Market Committee already said it will keep short-term interest rates around zero for the next two years," said Satoshi Tate, a senior dealer at Mizuho Corporate Bank. "It's unlikely Bernanke would go beyond this now." The absence of any additional monetary easing steps, which would weigh on interest rates, would be positive for the dollar ahead, dealers and analysts said. The euro could suffer as a consequence, some said. WORLD A new $100 billion fund unveiled by Japan weakened the yen Wednesday in New York trading, as traders mulled the longer-term implications of efforts to curb the currency's persistent strength. In the wake of a downgrade by Moody's Investors Service of Japan's sovereign credit rating to Aa3, the government announced new measures to discourage further gains in the yen, which just last week surged to a record high against the dollar below Y76. In addition strengthening oversight of foreign exchange markets, the finance ministry will establish a $100 billion facility to encourage companies to exchange yen for foreign currency-denominated assets. The new fund will use some of the country's massive stockpile of $1.15 trillion in foreign reserves. Japan's announcement works at cross purposes. It's a tacit acknowledgement that the world's third-largest economy is reluctant to fight investors who use the yen as a safe-haven as they flee global turmoil. But some analysts saw the moves as a sign that direct yen-selling from the Bank of Japan won't occur anytime soon, which could embolden traders to eventually probe the yen's upside anew. The new fund "reduces speculation that Japan will intervene again at these levels, and it allows companies to deal with a stronger yen rather than the BoJ weakening the yen," said John Doyle, a trader at Tempus Consulting in Washington. "Traders see the risk of them coming into the market around Y74 or Y73," if at all, he added.