Weekly Review and Outlook: Risk Appetite or Risk Aversion? Dollar's the Victim Anyway

The messages in the markets were rather confusing. On the Friday, we saw headlines saying better than expected US GDP data reduced safe haven demand for dollar and investors sought higher-yielding currencies, which means markets were looking for risks. This was inline with the fact that dollar was sold off across the board and the dollar index dived through 78.32 low set earlier in the week while crude oil extended recent rebound and was back to as high as 69.74. However, at the same time, we also saw headlines saying that bonds climbed in safe-haven buying because consumption data in the Q2 GDP report showed unexpected contraction which indicates consumer demands are still weak. This was supported by sharp fall in treasury yield with 10 year notes year diving to as low as 3.495% while gold also surged to as high as 960. Stocks were held below the high set on Thursday. Sharp gains were seen in the safe-haven currency, Swiss Franc, against dollar and euro. So are investors seeking risks or avoiding risks?

The messages from IMF were equally confusing. On thursday, IMF said that Europe's economy recovery hinges on cleaning European banks. Recession is expected to end in Eurozone in 2010 but recovery will remain weak. More importantly, IMF said that Euro is euro "is somewhat on the strong side relative to its fundamentals" and is up to 15% overvalued. On Friday, IMF said financial strains in US are still "elevated" and recovery will likely be "gradual" with risks "tilted to the downside". Potential growth in US could "remain well below past trends for a considerable period". In addition, IMF said that dollar was "moderately overvalued, although the assessment was subject to unusually high uncertainty." So, what is overvalued?

Do you feel wasting your time reading the above? Well, we do. It's sometimes quite frustrating reading the news and it's better going back to the charts, which always show you the true picture, even though sometimes it's us who can't comprehend implications of that picture.

Let's recap the figures first. DOW rose merely 0.9% last week to close at 9171.6. Nikkei was strong though, rose 4.1% to close above 10000 level again at 10356. MSCI World Index rose 1.7% to 1044.8. MSCI Emerging Market Index rose 2.5% to 844.02. VIX was mildly higher and rose from 23.09 to 25.92. Yield on 10 year note dropped from 3.67% to close at 3.5 % after making an intra-week high of 3.77%. Gold rebounded strongly from intra-week low of 927.6 to close nearly flat 955.8. Crude oil also rebounded strongly from intra-week low of 62.7 to close at 69.50.

In the currency markets, Dollar index, reversed sharply after rebounding to 78.66 and closed at new low in 2009 at 78.30. With the exception of CAD and AUD, dollar is still holding above recent lows against other majors currencies. Yen crosses are rather mixed with European yen crosses still held below medium term trend line support turned resistance. Commodity yen crosses were strongly but were still held below recent highs.

Technically speaking, stocks in US were losing momentum despite making new highs last week. As mentioned before, we're expecting strong resistance in DOW as it approaches key level of 38.2% retracement of 14198 to 6469 at 9422, see following chart and the development is inline with such expectation so far. On the other hand, momentum in stocks markets elsewhere remain strong, in particular in emerging markets. Yield on 10 year notes, as seen in the following chart, should have completed the corrective rebound in July and the near term down trend since June is likely resuming, which suggests that bond is strengthening. The CRB index, as seen in the follow chart, made an impressive rebound after initial retreat and even extended recent rally. Current rise is expected continue to have a test of 266.17 high at least. Commodities will likely remain strong.

The above pictures suggest that we're probably facing a situation where risk appetite and risk aversion are happening simultaneously. Investors could be starting to take profits from US stocks considering over 40% rebound from March low. Funds are starting to flow out of stocks into bonds for safe-haven buying. On the other hand, yield seekers are flowing out of dollar due to pessimism in the US economy as well as fall in yields. The funds could now be flowing into emerging markets for expectation of stronger recovery there as well as commodities which could be led by strength in emerging markets like China. We should start to think about abandoning using the terms "risk appetite" and "risk aversion" to describe the world's financial markets in general, as outlook in individual countries are diverging.

Dollar is expected to remain weak this week and new lows are anticipated against major currencies. Three central banks will meet this week including RBA, ECB and BoE. In addition, we'll have a number of important economic data included ISM Indices and Non-Farm Payrolls from US.

Markets are looking for something hawkish from RBA, after Governor Stevens gave some upbeat comments on the outlook of Australia economy last week. Stevens said that the down turn in the economy was not "one of the more serious ones of the post war ear, and he sees "upside risks to the outlook, to balance out the downside ones, than was the case six months ago." Markets perceived that as a hint that RBA has done with easing and is starting to turn direction direction to an eventual rate hike next year.

BoE's GBP 125b asset purchased program was completed on July 30 and it's uncertain on what the bank will do next. Note the bank was granted permission to extend the quantitative easing program by another GBP 25b but there is no information on how the bank will use this fund yet. Markets will watch the statement closely. Nevertheless, BoE meeting may turn out to be a non-event as the MPC members could wait for more information from the Inflation Report to be published on Aug 12 before making a decision.

No change in rate is expected from ECB this week. The main focus will be on any reference to downside risks in inflation where we already have Eurozone CPI dropped to record low of -0.6% yoy in July.

To summarize, important economic data this week include:

¦US: ISM Indices, personal income and spending, factory orders, non-farm payroll
¦Eurozone: ECB, final reading of July PMIs, retail sales
¦Swiss: SVME PMI, CPI
¦UK: BoE, nationwide consumer confidence, NIESR GDP estimate, PPI
¦Canada: Employment report, Ivey PMI
¦Australia: RBA rate decision, retail sales. trade balance, employment report
¦New Zealand: Employment report
AUD/USD Weekly Outlook
AUD/USD's break of 0.8262 last week confirmed that whole medium term rally from 0.6284 has resumed. After some pull back, AUD/USD extended rise from 0.7702 to as high as 0.8364 to close the week strongly. Initial bias remains on the upside this week for 61.8% retracement of 0.9849 to 0.6008 at 0.8382 and probably further. However, we'd start too look for reversal signal and sign of losing momentum as AUD/USD approaches 0.8519 key resistance. On the downside, below 0.8240 minor support will turn intraday outlook neutral first. Further break of 0.8124 support will argue that AUD/USD might have topped out already and will turn focus to trend line support at 0.7914.

In the bigger picture, there is no change in the broader view that price actions from 0.6008 are correction to down trend form 0.9849 only. Rise from 0.6284 is the last leg and should be near to completion. Upside is expected to be limited by 0.8382/8519 resistance zone (61.8% retracement of 0.9849 to 0.6008 at 0.8382) and finally bring reversal. Break of medium term rising trend line (now at 0.7914 will be the first sign of topping in AUD/USD. Further break of 0.7702 support will confirm this case and turn outlook bearish. However, note that sustained trading above 0.8519 resistance will argue that whole rise from 0.6008 is possibly developing into a new trend and will open up the prospect of a retest on 0.9849 (08 High).