Markets Shift Back into Risky Assets

Forex News and Events:

The overhang of mixed economic data and geopolitical tensions emulating (accumulating) for the Ukraine are giving assets a tentative risk-on feel. At the end of last week, risk concerns became too much for investors who shifted into safe haven seeking mode. Developed market equity reversed the week’s earlier gains. In the US, defensive stock sectors utilities and energy performed well, illustrating this broad safe haven rotation. Perhaps equity investors are not purely liquidating stocks but ratcheting down high beta trades and moving towards defensive portfolio positions. High quality sovereign bonds and gold completed the safe haven rally. Volatility has been on the rise as the VIX rose to 14.94 on reports that the Ukraine attacked a Russian armored column on Ukrainian soil, while confusion surrounded the Russian sponsored humanitarian aid convoy of white trucks. German equities have become highly sensitive to any development regarding Russia. This correlation was highlighted by a news report last Friday and corresponding collapse of the DAX. Within the geopolitical spectrum supply disruptions from events in Iraq and Russia have pushed Brent off the 3-month lows yet additional supply from Libya and worries over global growth continues to weigh on energy. The start of the week’s tensions in key risk points have lessened slightly which should allow risky assets to regain, yet we don’t expected any significant rally. We remains bearish on countries with weak inflationary trend such as CHF and EUR and commodities currencies.

Yellen and Jackson Hole

Outside of the situation in the Ukraine, investors will be focused on Fed Chair Yellen’s keynote speech Jackson Hole Symposium (10am Friday EST + Draghi will also be speaking) on “Re-evaluating Labour Market Dynamics.” Yellens speech plus the other highlight of the week, July FOMC Minutes, should provide insight on the Fed's view on the US labor markets ”slack.” Yellen still feels that the swift pace of job creation lacks indications of inflation pressure (specifically driven by wages) and therefore she is in no hurry to raise rates. The market expectations for the Fed policy path is not as dovish as it was earlier in the summer, so comments that suggested further lack of concern for inflation will be a negative for USD. As for our mid-term view, regardless of this week's event, we suspect that the Fed is underestimating the underlying price pressure generated by unemployment at 6.1 and believe wage growth will pick up. This makes us squarely USD positive for the rest of the year.

Today's Key Issues (time in GMT):

2014-08-18T07:30:00 SEK 2Q Industry Capacity, last 88.50%
2014-08-18T09:00:00 EUR Jun Trade Balance SA, exp 15.0B, last 15.3B
2014-08-18T09:00:00 EUR Jun Trade Balance NSA, exp 15.1B, last 15.4B
2014-08-18T12:30:00 CAD Jun Int'l Securities Transactions, exp 5.00B, last 21.43B
2014-08-18T14:00:00 CAD 15.août Bloomberg Nanos Confidence, last 58.6
2014-08-18T14:00:00 USD Aug NAHB Housing Market Index, exp 53, last 53

The Risk Today:

EURUSD EUR/USD continues to hold above its recent low at 1.3333 but rallies have thus far been unimpressive. Hourly resistances can be found at 1.3415 (13/08/2014 high) and 1.3444. In the longer term, EUR/USD is in a succession of lower highs and lower lows since May 2014. The downside risk is given by 1.3210 (second leg lower after the rebound from 1.3503 to 1.3700). A strong support stands at 1.3296 (07/11/2013 low). A key resistance lies at 1.3549 (21/07/2014 high).

GBPUSD GBP/USD is trying to bounce near the key support at 1.6693 (see also the 38.2% retracement and the 200 day moving average). Hourly resistances stand at 1.6844 (13/08/2014 high) and 1.6893 (01/08/2014 high). In the longer term, the break of the major resistance at 1.7043 (05/08/2009 high) calls for further strength. Resistances can be found at 1.7332 (see the 50% retracement of the 2008 decline) and 1.7447 (11/09/2008 low). A decisive break of the key support at 1.6693 (29/05/2014 low, see also the 200 day moving average) is needed to invalidate this bullish outlook.

USDJPY USD/JPY continues to bounce after the sharp bullish intraday reversal (hammer) made on 8 August. However, the key resistance at 103.02/103.09 (30/07/2014 high) will be hard to break. An hourly resistance lies at 102.72 (15/08/2014 high). Hourly supports can be found at 102.02 (11/08/2014 low) and 101.51. A long-term bullish bias is favoured as long as the key support 99.57 (19/11/2013 low) holds. However, a break to the upside out of the current consolidation phase between 100.76 (04/02/2014 low) and 103.02 is needed to resume the underlying bullish trend. Another resistance can be found at 104.13 (04/04/2014 high), while a major resistance stands at 110.66 (15/08/2008 high).

USDCHF USD/CHF made new lows on Friday, confirming a short-term correction. Monitor the support at 0.9008 (see also the rising trendline). Another support can be found at 0.8969 (17/07/2014 low). Hourly resistances lie at 0.9071 (15/08/2014 high) and 0.9115. From a longer term perspective, the recent technical improvements call for the end of the large corrective phase that started in July 2012. The long-term upside potential implied by the double-bottom formation is 0.9207. Furthermore, the break of the resistance at 0.9037 calls for a second leg higher (echoing the one started on 8 May) with an upside potential at 0.9191. As a result, a test of the strong resistance at 0.9156 (21/01/2014 high) is expected.

Resistance and Support: