Intraday Market Thoughts Archives

S&P finally follows on its April warning and downgrades US debt rating to AA+ from AAA. Less than 1 week after China's rating agency downgraded the US, S&P is the first of 3 US major agencies to do so. Late Friday's positive developments in Europe helped EUR and GBP along with risk assets, but the S&P downgrade should lead to fresh losses in Monday Asia, especially in USDJPY, USDCHF with fresh gains in gold & silver. Weekly CFTC data showed a rush out of euros with yen longs expanding. You can see Ashraf's Saturday interview telling AlArabiya that gold's inflation-adjusted record stands around $2300.

S&P explained : "The political brinksmanship of recent months highlights what we see as America's governance and policymaking becoming less stable, less effective, and less predictable than what we previously believed. The statutory debt ceiling and the threat of default have become political bargaining chips". S&P made sure to note the lack of tax hikes exacerbated the black hole, stating "It appears that for now, new revenues have dropped down on the menu of policy options."

Ashraf's Saturday interview telling AlArabiya that gold's inflation-adjusted record stands around $2300 http://www.youtube.com/watch?v=vLfowQLcpck&feature=player_embedded

On Friday, the S&P500 fell 0.1% to 1199 on Friday but it was a volatile session for risk assets. Sentiment improved after non-farm payrolls beat estimates and the prior was revised higher. On the downside, the participation rate hit a 28-year low. Even if the US can avoid recession, it now appears to have a structural employment problem that will be very difficult to eliminate. The bigger story was the Italys Berlusconi announced accelerated reforms to labour and welfare and will introduce a balanced budget amendment.

The Canadian dollar fell even though Canadas unemployment rate fell to 7.2% from 7.4% as the 7.1K jobs created missed estimates of +28.4K. The report wasnt nearly as bad as advertised because the wind down of government stimulus jobs skewed the numbers. A huge 71K decline in government jobs masked 94.5K new private sector jobs the best performance since April 2000. Statistics Canada noted that youth workers were having difficulty this summer finding work so the drop in the unemployment rate may have been due to students giving up looking as summer winds down rather than real workers giving up.

Another drop in CAD came as Canadas Ivey PMI falls to 46.8 in July from 59.4. Its a large drop but it baffles us that anyone trades around this data point. Its extremely volatile, always trendless and indicative of nothing 9-out-of-10 times.

The Swiss franc was easily the best performer on the week. AUD was the laggard. Crude declined 9.2% on the week. Looking at the charts, there is a substantial weekly reversal in AUD/USD as it fell to the lowest weekly close since late March.

Fridays CFTC commitment of traders report showed net longs in EUR cut down by 90% while JPY longs expanded 16% to the highest since at least Jan 2007. Its important this week to remember that the data covers only through the close on Tuesday. The yen buyers would have been hurt by the BOJ intervention on Wednesday. CHF longs expanded by 61%. Australian dollar positions were scaled back from a near-record high after Tuesdays RBA meeting.

In light of the late Friday developments (talk of ECB agreeing to buy Spanish bonds), we are adding two trades to our Premium Intermarket Insights. The rest of the trades issued on Friday morning have not been updated. Here is the direct link to those trades http://ashraflaidi.com/products/sub01/access/?a=469

Non-members can subscribe here for the Intermarket Insights http://ashraflaidi.com/products/sub01/

Despite a better than expected July US jobs report (NFP +117k from +18K, Unemp rate 9.1% from 9.2%, average hourly earnings 2.3% y/y from 1.9% y/y) stocks reverse the early morning gains seen in the futures market. Silver still holding above the 100 dma and July 1st trendline support, underperforming gold, which is regaining 1660s. Aussie is the worst performer of the day, followed by CAD, after Canada Jobs report disappointed and the Ivey manuf survery sank to 45.20 from 68.20. USDCAD did manage to push higher but facing stiff resistance at the 200 dma (not breached it since Sep 2010). Both of our Premium EURUSD & USDJPY trades (posted Friday 4:30 GMT) hit all targets, while EURGBP Premium has been executed and is in progress. Traders must look at our Monthly EURUSD Techs, which raise important implications for the medium term outlook. The use of EURO VOLATILITY (equiv to VIX for EUR) also tells an important technical development ahead. For the rest of our Friday Premium Intraday Insights, click here: http://ashraflaidi.com/products/sub01/access/?a=469;

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Ashraf Laidi

European turmoil set to continue ahead of rumoured Merkel/Sarkozy/Zapatero talks, Italian GDP and Industrial production, UK producer prices and US payrolls. Ashraf's latest Premium trades include EURUSD, USDJPY, EURGBP, gold, silver and USD crude with new charts on EURUSD 1-month volatility.

Yesterdays falls in European markets look set to continue today as fears about the solvency of Spain, and more so Italy has raised the likelihood that against a backdrop of slowing growth, and rising bond yields Italy may not be able to avoid defaulting on its large mountain of debt. Rumours of a bank run in Italy late last night sent the Swiss franc soaring once more to record highs against the single currency. There is some talk in the market that Sarkozy could well make a statement today after talking with Merkel and Zapatero overnight.

Talk of the ECB buying peripheral debt wasnt enough to stop the slide in sentiment and unless European leaders get a grip on the situation today we could well be set for a Europe Lehman moment.

Latest Premium trades use a TOPDOWN TECHNICAL approach, with monthly view, followed by weekly stochastics and EURUSD 1-month volatility charts. DIrect access here: http://ashraflaidi.com/products/sub01/access/?a=469

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Todays release of Italian industrial production data for June and Q2 GDP data arent likely to assuage concerns that Italy is not able to grow fast enough to be able to service its debt. Industrial production expectations for June are for a gain of 0.2% after a drop of 0.6% in May, while Q2 GDP is expected to come in at 0.3%.

EU commissioner Barrosos comments that he had deep concerns about Italy and Spain, and calling for the EFSF to be expanded, merely highlighted the divisions within Europe especially as the demand was swiftly rejected by Jens Weidmann head of the German Bundesbank.

In the UK, producer prices for July are expected to remain elevated with input prices rising to 18.7% Y/Y and output prices 5.8%, but these figures remain pretty much irrelevant with the Bank of England continuing to sit on the sidelines over fears of a stuttering recovery, as the likelihood of a move on interest rates, remains unlikely in the near term, and given current market turmoil, virtually non existent.

In the US it will be hoped that todays July employment report will lift the dark mood overshadowing global markets, however with expectations of gains of 85k, up from Junes horrible 18k, hopes arent too high.

With sentiment as depressed as it is it would take an almighty beat to shake the market out of its fear, while a miss on the downside could well open up further risk aversion.

The global financial crisis may have returned and entered a new, frightening phase as risk assets wilted on Thursday. Fear gripped markets on worries of a double-dip recession in the United States and a sovereign crisis in Europe that appears to have enveloped Spain and Italy. EURUSD 1-month volatility suggests further downside in the sport rate. Ashraf will bring those charts to Premium subscribers to the Intermarket Insights, being prepared as we speak.

If the Fed was pondering further action, policymakers must now be facing enormous pressure. If rates werent already at zero, the recent plunge in the S&P 500 would probably have forced an emergency meeting. It was the ninth-worst day in the history of the Dow and the worst since 2009 as it fell 512 points to 11383. The S&P 500 fell 60 points, or 4.78%, to 1200. It was an accelerating liquidation of stocks and commodities and a flight to bonds with currencies trapped in the middle.

The Fed does not want to do a QE3 operation that mirrors QE1 and 2. Instead, look for the central bank to begin crafting a creative plan.

The trigger on Thursday was a blowout in Spanish and Italian bonds. Rumours of a run on deposits at Italian banks after the ECB reinstated long-term refinancing operations worsened trading. The European community can afford to bail out Greece, Ireland and Portugal but the economies of Italy and Spain are far larger and a genuine borrowing crisis there is a true risk to the existence of the Eurozone.

At the same time, US growth is wilting and Japan is trapped in an endless cycle of near-zero growth. In the most simplistic terms: the US, Europe and Japan are broke and their economies arent growing.

The Swiss and Japanese have alternated attempts to devalue their currencies in the past two days but its a losing battle as deposits in Europe flee to the safety of Switzerland and the yen carry trade collapses. The CHF and USD led the market on Thursday; AUD, NZD and JPY were the laggards.

Stepping away from the fear, the volatility in markets presents incredible opportunities to short-term traders, especially in a two-way market like FX. Look for signs of panicked liquidation, keep stops tight and expect quick gains of 100-200 pips.

Economic data becomes secondary at a time like this, even non-farm payrolls will be a short-term event as sentiment, technicals and market psychology dominates.

The events in the Asia-Pacific session include the releases of the RBAs monetary policy statement at 0130 GMT. Leaders must be feeling good about opting to remain on the sidelines given the developments in markets. Positive commentary about the domestic economy is unlikely to boost AUD because policymakers made it clear they are focused on external economies.

European bourses plunge on sovereign debt fears, US markets hit multi month lows, ECB and BOE leave policy unchanged, borrowing costs surge in Italy as solvency fears grow, gold prices slump on margin hike rumour. Latest Premium trades to follow ahead of the US close. Euro 1-month volatility underscores further losses in the sport rate. Ashraf will bring that up in the upcoming Premium trades.

European markets plummeted with miners and banks dragging markets lower. Italian markets have led the falls, down over 500 points on the day as banks got slammed.

US markets are intensifying the losses with the Dow Industrials Index testing the 55-week MA and the March lows. Talk amongst three former FOMC members for further stimulus saw a late rally in the US last night; however this late rally was completely wiped out this morning.

The impact of this morning's currency intervention by the Bank of Japan has diminished as USDJPY drops back below 79. The announcement of an additional 10trn yen of stimulus also helped, however the failure to overcome the 80 level could well see the dollar slip back.

The Bank of England unsurprisingly left interest rates unchanged for the 29th month in a row, as did the ECB leaving interest rates unchanged at 1.5%.

The biggest problems remain the borrowing costs of Spain and Italy with this morning's Spanish auctions seeing higher yields, while Italian yields continue to rise despite Berlusconi's attempts to calm the markets last night.

Trichet's comments this afternoon did see a pop higher in the euro when he suggested that the bond buying program could restart at any time, however unless politicians get serious about the deteriorating situation in Europe's bond markets the fear premium will continue to hold sway. Italian government officials courting Asian investors to buy Italian bonds were told that if the ECB won't buy your bonds, why should they? With Bundesbank President Jens Weidmann said to be vehemently opposed to bond purchases this sorry saga looks as if it still has some way to run.

Gold prices have plunged after making new highs today on rumours of a margin hike; however it remains likely that that dips could well be sought after on the back of uncertainty in Europe.

Bank of Japan decides enough is enough and also eases policy further, Bank of England set to stay pat on rates and stimulus, while markets look to European Central Bank to stabilise bond markets and leave rates unchanged. US slowdown fears increase ahead of weekly jobless. Link to the latest THURSDAY TRADES are below.

This mornings intervention in the currency markets by the Japanese authorities has driven the yen lower as policymakers in Tokyo decided to follow in the footsteps of the Swiss National Bank yesterday, and take measures to arrest the yens rise. The Bank of Japan also announced additional monetary easing in the form of another 10trn yen, increasing the amount to $630bn in order to ease the pressure on their exporters who are being hurt by the yens rise.

We have added NEW PREMIUM TRADES in USDJPY & EURUSD after all targets from Wednesday's & Monday's initial dual trades (initially posted Wed 19:15 GMT) hit all targets in Thursday Asia. New updates made Thursday 2:00 GMT (Wednesday 22:00 EST) Subscribers can see the trades here http://ashraflaidi.com/products/sub01/access/?a=467 NONsubscribers can go here: http://ashraflaidi.com/products/sub01

This month's task by the Bank of England may well have been made somewhat easier yesterday when services PMI for July confounded expectations with a rise to 55.4, its strongest reading in four months and well above expectations for a decline to 53.6. This better than hoped for figure more than made up for the surprise fall in manufacturing on Monday, and has also in all likelihood delayed the growing calls for the consideration of further monetary stimulus as a solution to the problem of a slowing growth cycle.

Market expectations are for the Bank of England to stand fast on interest rates at 0.5%, though the minutes will probably make interesting reading to see whether or not anyone else has started to become more dovish with respect to the recent slowdown in economic data.

The European Central Bank will then take its turn in the spotlight, and given this weeks turmoil in Europe in Spain and Italy, markets will be looking to the ECB to restart its bond buying program in the absence of any other support mechanism, as a stop gap measure, until EU leaders can get the necessary parliamentary authority to allow the EFSF to act as a buyer of European bonds.

Markets are not expecting any change in policy and rates are expected to remain at 1.5%, however it will be at the press conference that the real action will take place.

Trichets every word will be scrutinised for every nuance with respect to his feelings about the outcome of the July EU summit, and the agreement with respect to haircuts on Greek bonds. The banks policy on inflation and rate policy, will also be put under laser like scrutiny in light of the pressure on Spanish and Italian bond yields, as well as strong vigilance, given Noyers remarks last week.

Yesterdays disappointing ISM services numbers did nothing to assuage fears about the US economy despite July ADP numbers coming in ahead of expectations. Todays weekly jobless numbers could go some way to helping bolster sentiment ahead of tomorrows key US employment report for July.

We have added new Premium trades in USDJPY & EURUSD after all targets from Wednesday's & Monday's initial dual trades (initially posted Wed 19:15 GMT) hit all targets in Thursday Asia. New updates made Thursday 2:00 GMT (Wednesday 22:00 EST) Subscribers can see the trades here http://ashraflaidi.com/products/sub01/access/?a=467 NONsubscribers can go here: http://ashraflaidi.com/products/sub01

The stock market avoided 9 consecutive days of losses, gold hit another record and the CHF bounced after the Swiss National Bank lowered interest rates. 2 Important trades in Wednesday's Premium Section on S&P500 that could indicate a sea change in sentiment.

The S&P 500 rebounded 0.5% to 1260. Aside from the effects of a risk rebound, talk of QE3 is ramping up as the stock market kicks and screams in the face of slumping economic data. Given overwhelming negative sentiment that has driven down stocks and risk assets over the past two weeks, its easy to envision a relief rally prior to Fridays non-farm payrolls report as shorts cover due to the risk of an upside surprise. The chief risk is from S&P who has yet to deliver a verdict on the US credit rating.

For more on the LATEST TRADES, including MULTI-TIME FRAME OSCILLATOR CHARTS, see the trading ideas from Ashraf: http://ashraflaidi.com/products/sub01/access/?a=467 To become a member, click here: http://ashraflaidi.com/products/sub01

The WSJ reported comments from three former FOMC members calling for further action from the Fed. The most likely course of action from the Fed is for some type of commitment to keep rates low rather than outright bond purchases. In any case, with yields near the lowest levels of the year, there is little the Fed can do besides boost sentiment and devalue the dollar.

The SNB aimed to reverse the rally in CHF by pledging to lower rates to as close to zero as possible from 0.25% and also signalled that it would inject USD$104-billion into the Swiss economy. The also called the CHF massively overvalued in a hyperbolic comment that sounded more like desperation than a threat.

Undoubtedly, the SNB squeezed out some short-term franc shorts but even in EUR/CHF, the rebound wasnt enough to erase the losses from a day earlier. A side effect from the SNB action was to highlight the safety of precious metals. Gold gained $22, or 1.3%, to $1666/oz. Silver outperformed once again as it climbed to 4.2% to $41.76. Oil fell below $92/barrel on growth worries.

The July ISM non-manufacturing index fell to 52.7 from 53.3 in June and missing the 53.5 consensus. The ADP employment report also boosted optimism with a reading of 114K compared to the 100K expected. Unfortunately, the prior was revised 12K lower to 145K. The round of US growth downgrades continues as JPMorgan cut its Q3 forecast a full handle to 1.5% from 2.5%.

Earlier in Asia-Pacific trading, New Zealand released Q2 jobs data. Employment increased 2.0% y/y and the unemployment rate was at 6.5%, both were in line with expectations.

Looking at the way the manufacturing ISM (green) has preceded services ISM (white) into the downside, it is fair to expect today's release of July services ISM to come in near 50 than the expected 53. http://ashraflaidi.com/t/?hc2591 More importantly (and worryingly), the overall downtrend appears unlikely to be reversed without any considerable dosage of stimulus. Watch in Q4 2010 how both ISMs recovered on the anticipation/announcement of the Feds QE3 program. Without the stimulus, the ISMs appeared to have been heading back below 50. Similarly, the rebound in Q2 2009 was partly boosted by the official announcement of QE1 in March 2009. But the move was signalled 3 months earlier by the Feds decision to slash interest rates to zero in December 2008. BOTTOM LINE: QE3 is inevitable. It may not be called QE3, but it will take the form of further stimulus, at which point it will test the resilience of the market bears (not bulls).

Debt fears put Europe in spotlight as Spain and Italy come under attack, weak UK Services PMI could provoke stimulus debate, AUD retail sales slide, Chinese services PMI, US ADP.

Fiscal fears about the political leadership in both Italy and Spain has seen investors head for the exits. Concerns about the leadership in Italy and the relationship between Berlusconi and his finance minister Tremonti, combined with Spanish PM Zapateros decision to delay an election until November has thrown the proverbial dice into the air, in this game of poker between the markets and EU politicians.

There is also the realisation that the EFSF is in no fit state to handle a crisis in two of Europes largest economies and this has seen Spanish and Italian 10 year bond yields push above 6% and stay there, as the 7% level slowly comes into view on the horizon. The 7% level remains the line on the sand where ultimately Greece, Ireland and Portugals borrowing costs became unsustainable.

Todays economic data releases arent likely to offer much comfort with Euro zone services PMI for July expected to hold steady at 50.8. Retail sales for June arent expected to improve matters much either, with a gain of 0.5% expected after Mays 1% decline, in continued signs of consumer retrenchment as the sovereign debt crisis continues to constrain confidence.

In the UK a weak services PMI number could well reignite the stimulus debate ahead of tomorrows Bank of England meeting. Yesterdays construction PMI for July surprised to the upside, but given that services makes up 70% of the UK economy it is this number which will bear the most scrutiny. Expectations are for a small decline to 53.2, from 53.9 and the Chancellor will be hoping that the numbers come in pretty near to expectations.

In Australia retail sales for June slumped 0.1%, underlining the RBAs rather dovish outlook earlier this week and sending the AUD sharply lower.

Fears of a slowdown in economic activity in China continue to weigh on risk after official services PMI and HSBC Services PMI, once again showing conflicting signs, but the HSBC measure, which is probably the more reliable slipped back to 53.5, from 54.1 the previous month.

US markets will be looking for some welcome good news after yesterdays shock fall in personal spending sent stock markets spinning to close at 2011 lows with the release of July ADP figures.

In amongst all this uncertainty gold continues to surge hitting new all time highs against the US dollar, euro and the pound.

The US stock market crumbled on Tuesday, pulling down AUD with it while CHF and gold soared to fresh records. Disappointing US consumption data and signs of worried leaders in Europe were the catalysts. The Australian dollar will remain in focus with upcoming retail sales data.

It was a wild day in markets. It appears as though the debt ceiling debate forced people to wait for the euphoric bounce before piling into risk off trades based on a stalled US economy.

The debt ceiling debate seems like old news as it passed in the Senate and Obama prepares to sign it into law. Signs of a rapid slowdown in the US economy are mounting. US personal spending fell 0.2% in June compared to the +0.2% expected. Personal income was at +0.1% vs. +0.2% expected and there were large downward revisions. Fitch upheld the AAA rating for the US but noted that debt will hit 100% of GDP by the end of 2012 and warned that spending cuts are necessary in the medium term.

Spanish and Italian spreads over Germany hit fresh records after Spanish PM Zapatero delayed his vacation and Italy announced an emergency banking meeting.

The S&P 500 turned negative for the year falling 2.6% today to 1254. Its the first close below the 200-day moving average in nearly two years. Negative technicals were compounded by a fall (and close) below the June lows and the neckline of the head and shoulders top. There have been eight consecutive sessions of selling in the longest losing streak since 2008 and the past five have come on higher than average volume.

CHF hit records against USD, EUR and GBP. AUD was the laggard (AUD/CHF fell 338 pips, or nearly 4%). Gold climbed 2.4% and silver gained 3.7%. Ashrafs article from last week on silver is especially pertinent. Not only has silver climbed, but it hasnt been especially volatile: http://ashraflaidi.com/articles/silver-lining-debt-ceiling-quant-easing.asp

Yields on the 10-year Treasury fell 13 bps to 2.61% -- the lowest since November. Technicals point to a fall toward 2.40% which correlates with further declines in USD/JPY.

Asia-Pacific Preview

Australian retail sales are expected up 0.4% after a 0.6% contraction at 0330 GMT. At the same time, the trade surplus is expected at $2.23B. Chinese services PMI at 0100 GMT. The prior was 57.0.

Its difficult to envision that good news will boost AUD given the content of the RBA decision. Policymakers conceded that the domestic economy is strong but held rates at 4.50% entirely because of offshore worries.

Here are Ashraf's TV interviews on CNBC, ALJazeera English & Al-Arabiya (Arabic) discussing the implications of the debt ceiling deal, the swiss franc vs the yen, the Canadian dollar & the intermarket picture impacting gold, silver & equity indices.

CNBC: http://tinyurl.com/3bqmfcs

AlJazeera English: http://youtu.be/GTrkxKTvO6g

Al-Arabiya: http://www.youtube.com/watch?v=IOyzFm7PZrs

The Fed's favourite inflation gauge came in at 1.3% y/y, while UK PMI remaiend well above 50. But dovish comments from BoE's Charles Goodheart suggesting the MPC to have discussion on whether more QE is needed is helping to weigh on sterling. Intensifying deterioratiion in Spanish sovereign debt has pushed PM Zapatero to cut short his summer vacation as markets bet that Spain will be next inline for a bailout. Spain's 10-year yields hit 6.45%, nearing the key 7% level, which triggered Greece's bailout. The tensions are compounded by political uncertainty as Zapatero calls for early election in Nov 20. EURUSD finds support at . . .

EURUSD finds support at 1.4150s, while S&P500 is expected to stabilize near the 200-dma around the 1270s. Gold & silver may display slower action than last week but the lack of considerable selling remains a notable sign of resilience. Despite our continued bearishness in USDJPY, we issued tactical longs in the pair in last night's Premium Trades. The laetst edition of Today's PREMIUM TRADES is titled:"Explaining Dual Trades, USDJPY Temporary Shift" seen here: http://ashraflaidi.com/products/sub01/access/?a=467

To become a member, click here: http://ashraflaidi.com/products/sub01

Watch Ashraf on AlJazeera English at 14:00 GMT (18:00 Dubail Time)

AL

RBA leaves rates unchanged citing growth uncertainty in Europe and US, Growth worries in UK ahead of construction PMI, Eurozone PPI expected to slip back and ease pressure for higher rates as ECB meets this week. US House passes debt ceiling bill

This mornings decision by the Reserve Bank of Australia to leave rates unchanged at 4.75% wasnt too much of a surprise, even allowing for last weeks surprise rise in CPI. There has been some debate in recent weeks about the future direction of Australian interest rates, however the recent tightening in China along with some evidence of a slow down, amid uncertainty in Europe and the US has staid the RBAs hand.

The bank said that it remains concerned about the medium-term outlook for inflation and did consider whether recent information warranted further policy tightening, but given the fact that recent economic data has shown that downside risks for global growth has increased, it was felt prudent to leave rates as they were.

In the UK yesterday's July manufacturing PMI was a shocker, coming in at 49.1 and contracting for the first time since the recession in 2009, on the back of subdued domestic demand, even though export orders continue to remain strong. Today's July construction PMI should come in around 53.1, a slight decline from the 53.6 in June, but probably wont be enough to assuage concerns that the UK economy is starting to grind to a halt. Tomorrows services number will be the key number in that respect, given that services is the major contributor to UK GDP. As it is pressure is starting to build on the government to look at a plan B in light of yesterdays downgrading of 2011 growth forecasts by the CBI to 1.3% from 1.7%.

Pricing pressures in Europe could well start to ebb away despite last weeks slightly higher than expected German inflation numbers, with PPI prices for June expected to slip back slightly on a year on year basis from 6.2% to 5.9%. Given that Italian and Spanish 10 year yields are pushing the wrong side of the 6% level the last thing these countries need is a high inflation number given the ECBs almost one eyed gaze on suppressing higher prices with interest rate rises. This weeks ECB meeting will certainly be closely scrutinised for any mention of strong vigilance if todays numbers coming in on the high side.

See our latest PREMIUM TRADES titled:"Explaining Dual Trades, USDJPY Temporary Shift" http://ashraflaidi.com/ products/sub01/access/?a=467

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In the US the Republican controlled House of Representatives voted through the weekend agreement on the debt ceiling, leaving only a Senate vote today as the last obstacle. Now that this particular distraction appears to be behind us yesterdays shocking ISM data has shifted the focus back to the economy. It is highly unlikely that todays PCE numbers will be anything other than benign, as they have been for the last two to three years. This is the Feds preferred measure of inflation and one for which the US central bank has received a torrent of criticism for, given that it is so unrepresentative of pricing pressures in the economy.

A hawkish shift in rhetoric from the Reserve Bank of Australia may propel the Australian dollar to a fresh record high when the RBA delivers a rate decision at 0430 GMT. While most economists expect rates to remain at 4.75%, there is a considerable chance of a surprise hike after last weeks reading on Q2 CPI exceeded expectations. A more likely outcome is that the RBA signals future rate hikes, something that will also fuel AUD gains. Also see the link to NEW PREMIUM TRADES on EURUSD, USDJPY, EURGBP, S&P500 and US crude

We held the opinion the RBA would remain on hold in the coming months until the most recent RBA minutes and last weeks CPI. These reports suggest the next move from the RBA will be a hike. It probably wont come today but a hawkish statement should boost AUD around two cents in the days ahead.

The current mildly restrictive stance of monetary policy remained appropriate, has been the refrain from the RBA in recent meetings but the central bank is now likely to take a more hawkish bent after headline CPI climbed to 3.6% y/y from 3.3% y/y. Prior to the data, the RBA said the figures would be important in shaping views on rates.

Other reasons the RBA cited for holding rates last month included the uncertainty in Europe and the United States. The situation has arguably stabilized in Europe and the debt ceiling deal in the US is now set to pass. Due to the progress in Washington, RBA watcher McCrann of the Australian Herald Sun wrote today that hes confident the RBA is about to announce a hike. His recent track record is spotty but hes still one of the best-connected RBA watchers. After last weeks high reading on inflation ANZ Bank, one of the biggest in Australia, also called for a hike.

The Australian dollar declined in the aftermath of last months RBA decision as policymakers cited worries about employment and growth. But AUD rebounded when the minutes of the decision revealed that policymakers remain upbeat. The concerns in the statement sounded more like a simple adjusting of time frames in the minutes. They cited production delays and indicated that growth that was expected to be harvested in Q3 and Q4 is still coming, but not until early 2012.

Given those expectations for growth, the RBA will likely raise rates later this year. They may signal this today by saying The Board considers it likely that monetary policy will, over time, need to be adjusted further in order to ensure that inflation remains consistent with the target over the medium term.

This would be a strong signal for futures hikes and push AUD to a record high. The market is still pricing in lowered Australian rates a year from now, leaving AUD in a great position for gains. AUD/USD is trading close to 1.1000 after hitting a record 1.1080 last week.

Risks to this view are primarily external. The situation in Europe remains precarious and even though the US has a debt deal, growth is slowing. Domestically, what may keep the RBA on the sidelines is the belief that the high A$ will keep a lid on price pressures. Representatives from manufacturing and other non-resource sectors have also been lobbying hard for continued low rates.

See our latest PREMIUM TRADES titled:"Explaining Dual Trades, USDJPY Temporary Shift" http://ashraflaidi.com/products/sub01/access/?a=467

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The Republicans-controlled House voted to increase the debt ceiling, clearing the most formidable hurdle and all signs suggest the measure will pass through the Senate on Tuesday and the White House shortly after. But the positive sentiment from the deal lasted only hours as US manufacturing data disappointed.

House Republicans voted to pass the debt deal shortly before the US session ended and based on the accounts of the most reputable journalists in Washington, the deal is now virtually certain to pass. The market is now free to focus on the economy and will watch out for verdicts from the ratings agencies. A DOWNGRADE FROM S&P IS LOOKING LESS LIKELY after analysts there claimed on the weekend that quotes suggesting the necessity of $4 trillion in cuts were taken out of context.

EUR lagged followed by GBP. CHF was the best performer followed by USD in a violent first day of trading in August. EUR/USD traded in a wide range between 1.4187 and 1.4454. Sentiment was positive early on but was washed out by the July ISM manufacturing report which stole the spotlight from Washington as it fell to 50.9 compared to the 54.8 consensus and 55.3 prior. It was the worst reading in two years and barely over the 50 threshold for growth. New orders contracted for the first time in 24 months and the ratio of new orders to inventories was negative for the second straight month, a metric that has foretold recessions in the past.

The fall in the employment component to 53.5 from 59.9 prompted downgrades to NFP forecasts ahead of Fridays report with the market consensus is sliding to +50K from +90K.

The S&P 500 fell as low as 1274 after the IMS but rebounded to close at 1287, declining 0.4% but closing above the 200dma. Although stocks bounced back, they have declined in six straight sessions and the 200dma has failed to provide the kind of bounce we saw in June. Volatility generally leads to negativity as passive investors get nervous and go into cash; this should translate into further JPY and CHF strength with GBP, AUD and CAD vulnerable.

Nikkei news is reporting that the Japanese Ministry of Finance is preparing to intervene. There is also talk that the BOJ will introduce new easing later this week. Policymakers are hoping the two-pronged attack halts the fall of USD/JPY but it is a longshot. If anything, traders will be looking to sell USD/JPY bounces. The only intervention with a chance of success is coordinated intervention, and as Ashraf has repeatedly mentioned, the JPY is not especially strong against most G10 currencies.

Readers of Futures Magazine may have caught Ashrafs article about USDJPY on the July issue (initially written on June 18, 2011), making the technical and fundamental case for a lower USDJPY, basing it on cyclical trends in the pair. Due to copyright issues, we were unable to publish the article before the end of July. Nonetheless, premium subscribers to the Intermarket Insights were told of the ongoing short trades in USDJPY from 80 in mid June towards the mid 70s. The 760-word article, written on June 18, ends with the following So far, the outlook suggests the opposite and a return toward 78-75 is the more plausible scenario for the third quarter and remainder of 2011. Premium subscribers can get direct access here: http://www.ashraflaidi.com/products/sub01/access/?a=466 Non-subscribers can become members here: http://www.ashraflaidi.com/products/sub01/

USD continues to be sold despite a preliminary agreement on US debt ceiling. UK manufacturing sector contracts, Eurozone unemployment stays unchanged. Market turns to US July ISM manufacturing PMI.

USD shorts were covered during Asian trading but USD strength did not last long. Since London traders got to their desks they continue to sell the greenback as US downgrade has not been completely averted. Equity markets are higher on improved risk aversion while gold and silver pulled back slightly.

GBP was sold even against the weak USD after UK manufacturing PMI in July dropped to 49.1 from previous 51.4 which marks not only the sixth month of gradual worsening but also the weakest print since June 2009. Readings below the 50 level imply a sector contraction. MPC will announce their interest rate decision on Thursday. In light of latest round of weak data, rate hike seems unlikely.

Eurozone unemployment stayed unchanged and in line with expectations at 9.9% and final German manufacturing PMI for July was confirmed at 52 from 52.1. Eurozone manufacturing PMI in July was not revised and stayed at 50.4.

The New York session starts at 10:00 am ET with ISM manufacturing PMI for July. Analysts predict an unchanged reading at 50.4 which would be not only four months low but also dangerously close to the 50 mark that suggests a contraction.

Voting is expected today on preliminary agreement on US debt ceiling. Should the agreement be voted into a law, the greenback should see a relief rally.

Market relief on debt ceiling agreement, Europe PMIs set to remain weak as growth fears weigh, UK Manufacturing PMI set to slip amidst UK growth concerns, US ISM. Ashraf will be on CNBC-Europe today at 5:20 EST (9:20 GMT).

Friday's disappointing US GDP and Chicago PMI data have raised fears of a global soft patch on the back of the recent uncertain global fiscal backdrop. The debt ceiling agreement announced overnight has been greeted with some relief by equity markets in Asia, and will no doubt carry a positive read across when markets open in Europe this morning.

Under the proposed agreement a $1trn increase in the debt-ceiling would be coupled with an immediate $1trn cut in discretionary spending. A further increase beyond 2012 would be decided by a bipartisan committee to propose another $1.5trn of cuts, tax changes and increases, which would need to happen by November.

If this committee fails to come to an agreement on the second part, automatic cuts would be triggered to programs that both Republicans and Democrats have insisted were red line issues. Investors are still expected to remain nervous until any agreement is signed off by both houses, and then signed off by the President.

Despite this deal the outlook for the coming months growth wise still appears to be deteriorating.

Fears about China's growth story appear to be throwing out mixed messages about China's economy after the latest manufacturing PMI data for July. The HSBC manufacturing measure of PMI moved into contraction territory at 49.3, however the official PMI figure increased in July from 50.2 to 50.7.

This morning's manufacturing PMI data for July for Europe and Germany is likely to continue the weaker theme with German manufacturing PMI set to remain unchanged from the last reading at 52.1 and Euro zone PMI set to just about remain in expansionary territory at 50.2. This weaker PMI, especially in the Euro zone looks likely to increase concerns about the weaker European economies like Spain and Italy.

Concerns are growing about Spain's borrowing costs on the back of Fridays events with respect to Moody's putting the country on notice of a downgrade, while political uncertainty is about to be added to the mix after PM Zapatero announced the dissolution of parliament for September for a general election in November.

If he loses the election there is no guarantee that any new government will carry out any new austerity measures that need to be implemented in order for the country to avoid being dragged into the mire of needing a bailout. With 10 year yields above 6%, and heading towards the danger level of 7%, any further uncertainty is the last thing the country needs at this moment.

Ashraf offered six new trades late on Friday, including renewing his longstanding bearish case for USDJPY & the overlay charts. Subscribers can see them here: http://ashraflaidi.com/products/sub01/access/?a=465

To get a FREE 1-WEEK TRIAL, http://ashraflaidi.com/products/sub01/

In the UK, after last weeks growth figures elicited a sigh of relief from analysts everywhere, expectations are for manufacturing PMI to get the third quarter off to a good start with expectations of July PMI to come in at 51, slightly down on Junes 51.3. Any number sub 51 will increase fears that the UK economy could well miss its growth targets for 2011 by some way and shift further pressure on the Chancellor for a plan B.

In the US ISM Manufacturing will also be eyed for evidence of any recovery for Q3 in light of Fridays disappointing GDP number.