Dollar continues to slide with the catalyst for this fresh downside move emanating from China...

... finally disclosing the components of the basket pegged to the Yuan. Not surprisingly the Dollar, Euro, Yen and Korean Won were said to hold the major weightings with individual percentage allocation dependant on the bilateral trade and debt owed by China. With U.S. trade share with China around the same levels as China has with the Euro-Zone and Japan, the huge Dollar holdings would be replaced in favour of other currencies. Meanwhile Oil prices have gone to another record high breaking above $65 pb and with good reason as demand refuses to cow down with the decline in gasoline stockpiles adding to concerns. Also the pick up in other economies led by Japan is offsetting any positives emanating from strong Dollar fundamentals.

· Euro’s gains post China’s announcement were stiffened as the market had already priced in Euro’s presence in the basket with it being the natural alternative to the Dollar. Nonetheless the confirmation of this has added another supportive factor for the Euro as it breaks back above 1.24 with decent sized offers continuing to be lined up to 1.25. Earlier data remained firm with French Manufacturing and Industrial Production increasing in line with the recent pick up in exports and domestic demand however high oil prices pose a serious threat to this recovery and it remains to be seen the extent of damage this new spike would have.

· Yen rallied across the board and its turnaround is led by a surge in optimism for the economy’s outlook which has helped it negate all its losses on recent political uncertainties. For starters with China’s bilateral trade with Japan increasing steadily it would have a fair share of weightings in the Yuan basket which is likely to increase with time. While the recent data is pointing towards an impressive recovery with this morning’s Trade Balance showing surplus increasing by much higher than expected as exports have risen thanks to an improvement in global demand. Overseas investors are starting to put their faith back in the Japanese economy with Nikkei surging to a 4 year high.

· Pound got an unexpected boost from Bank of England’s Inflation Report as it suggested that they are content with one rate cut in the short term, hoping that the positive effects of this action would reflect immediately on the economy. Inflation is expected to stay around their target but at the same time downside risks persists and data outcomes are watched for further action. While this is more or less in line with market expectations but fears of aggressive rate cuts in a short time period have negated providing some welcome relief this has led to the Pound breaking the 1.80 barrier but some degree of profit taking is likely at these levels.

· Aussie has rallied back towards 0.77 thanks to a much better than expected outcome in the Employment data. 12.7K jobs were added against estimations of a decline this leading to the longest run of job gains in 10 years. This further reaffirms RBA’s stance to stay on hold as general slowdown in some key sectors notably housing and manufacturing is being offset by a strong labour market and healthy consumer spending. The New Zealand Dollar got a similar boost with its unemployment rate falling to 3.7% negating any chances of a rate cut.

Economic Data Released

GMT Release Region Previous Actual Comment
06:45 June Industrial Production m/m France 0.3% 0.3% Domestic demand has increased as well as exports thus production should rise,
09:30 BoE Quarterly Inflation report. U.K. _ _ Report points to risks of inflationary pressures on high oil prices.
18:00 July monthly budget statement USA -$69.2Bn -%52.8Bn Budget deficit declines on higher corporate tax received.

Upcoming Economic Releases
GMT Release Region Previous Forecast Comment
09:00 Q2 GDP q/q Euro-Zone 0.5% 0.3% Recent improvement In conditions to be reflected in Q3 with Q2 to remain weak.
12:30 July Retail Sales m/m USA 1.7% 2.0% Spending should remain robust as consumers optimistic about the outlook
23:50 Q2 GDP q/q Japan 1.2% 0.5% Improvements have been seen from Q3 but Q2 to reflect decline.



Technical Analysis

EUR/USD – Yesterday’s low was 1.2334 and high was 1.2425.
The pair closed at 1.2381.
The pair’s support keeps strengthening as it has stabilized around 1.24 for now looking to mount a fresh uptrend. However a major obstacle is faced within the 1.24 region which at least stiffen if not prevent gains with selling orders intensifying between the 1.2450-1.25 region. This region is very crucial as it has been last year with a clear break above likely to accelerate the Euro’s gains. On the downside, immediate strong support has come up to the 1.2310-25 region with bid interest on any forays below 1.23. Stronger support lies in the 1.2260-75 region which should cap any Dollar gains but a break below shifts the pair back in neutral territory. Data from both sides is eyed today for fresh direction.
Key resistance is seen at 1.2455 followed by 1.2305 while support starts at 1.2320 followed by 1.2260.

USD/JPY – Yesterday’s low was 110.39 and high was 111.79.
The pair closed at 110.56
The Yen is paring back its recent losses with sentiment back in its favour and strong Dollar bids and support around 110.75 have broken with further gains likely for the Yen. Immediate support for this pair comes up in the 109.80-95 zone which is a pivot region and where the recent post Yuan revaluation gains were capped. A clear break below this region will accelerate its losses before further support comes up around 109.10. Resistance levels have moved down with first line coming up at 110.90 and previous strong support mark of 111.55 is now poses as strong resistance and any gains for the pair should be capped at 112.
Key Resistance is seen at 110.95 followed by 111.55 while support starts at 109.80 followed by 109.10.

GBP/USD – Yesterday’s low was 1.7861 and high was 1.7978.
The pair closed at 1.7964.
The pair’s break above 1.80 is witnessing a bit of profit taking which is stiffening gains nonetheless the momentum and sentiment has moved away from the Dollar. Support levels have moved up significantly with immediate support coming up at 1.7890-1.7905 region with a break below bringing further support around 1.7825. This pair is prone to exaggerated movements with any dollar recovery expected to be capped at the 1.7755 pivot mark. On the upside immediate resistance comes up at 1.8045 with strong offers laced up to 1.81 which should cap any gains for the Pound
Key Resistance is seen at 1.8045 followed by 1.8095 while support starts at 1.7890 followed by 1.7825.

AUD/USD – Yesterday’s low was 0.7606 and high was 0.7662.
The pair closed at 0.7646.
The Aussie has got unexpected support from strong data but 0.77 region should continue to lead to strong resistance with selling orders intensifying above 0.7750 laced up to 0.78. It’s impressive rebound after dipping below 0.76 has shown the resilience of support around 0.7610 which continue to remain firm with the 0.7555 pivot mark expected to cap any Dollar gains. On the upside a break above 0.7755 is needed to raise hopes of a fresh uptrend

Key Resistance is seen at 0.7755 followed by 0.7795 while support starts at 0.7625 followed by 0.7555
Kunal Sharma
E-mail: kunal@easy-forex.com
www.easy-forex.com