US Dollar Gains Halted As Risk Appetite Returns

The USD lost some ground, as European markets opened higher and risk appetite seems to be cautiously creeping back. The EURUSD rallied to 1.3900, while the JPY crosses, which had been under significant selling pressure, rallied across the board. Yesterday, the S&P closed down almost 2.4% and major indexes in the Asia-Pacific region all closed lower. European indexes, which opened notably lower, have rallied back above break even.

In Japan, the BoJ held rates steady at 0.10% as was universally expected. It was an unanimous decision, with the BoJ noting that economic conditions have ‘began to stop worsening’ and domestic economic conditions are showing signs of leveling out. Members also noted that downside risks were still apparent in sluggish domestic demand and rapid fall in inflation. The recent rally in JPY has more to do with macro trend and risk aversion, than confidence in the Japanese economy.

In Australia , RBA minutes from the June meeting illustrated that members are moving away from further rate action, but have not completely ruled out the possibility. The release stated that the board “viewed the inflation outlook as affording scope for some further easing of monetary policy, if that were needed to support demand at a later stage”. In front of today’s BRIC conference, participants were examining yesterday’s TIC data. Net foreign purchases dipped on increased foreign selling of corporate bonds and decreased Treasury purchases, from $55.3bn previously to $41.9bn. Foreign stock purchases remained strong, but dipped from $13.2bn to $4.6bn.

US purchases of foreign assets rose, from $1.0bn to $23.0bn, as investors bought $13.8bn of foreign bonds and $9.2bn of foreign equities. Overall, there doesn’t seem to be any noticeable change in foreign demand for US assets. In a shift, the Kremlin economic aide stated that Russia would raise the issue of the USD reserve currency at today’s BRIC conference.

The comments weighted on the USD briefly. While the move was small, it highlights the fact that traders are hypersensitive to comments coming from this meeting. It is doubtful that any material decision on ansubstitute to the USD as a reserve currency can be reached. There are many questions such as size and depth of underlying markets, which need to be addressed, as well as fact that BRIC countries manipulate their currencies, which will make moving forward difficult.

EurUsd dollar is constructive as focus is now on the financial stability of the Euro zone. We maintain our bullish dollar stance but see a cap at 1.4042 with an initial resistance at 1.3750.

GbpUsd Sharp reversal at 1.6240 horizontal support. Initial resistance stands at 1.6440. Re-kindled worry for European economy points to a bearish trend forming with initial support at 1.6354 with a level in at 1.6306 and a floor in at 1.6243.

UsdJpy Risk aversion creeps back into markets as the dollar gains across the board and Yen out performs the dollar. Rapid decline to 96.08 today cleared out short term support. Further downside likely towards 95.33 ahead of 94.45 reaction low.

UsdChf Erratic trading has seen the pair actually trade a virtual double bottom (as opposed to a S-H-S formation like the EURUSD). Initial resistance at 1.0952 with a breakout level at 1.0988. On the downside 1.0650 is floor, with crucial (previous necklines) levels at 1.0750 and 1.0650. For now the pair is broadly bullish.

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