Yen Rises as China Stocks End Three-Day Rebound; Sterling Soft

08/26/2009 12:01 am EST

Focus: FOREX

Japanese yen and the dollar to a lesser extent are lifted as China stocks ended the three-day rebound and dropped nearly 2.5% in one day. In addition, the yen is supported by the sharp reversal in treasury yields, which saw yield on ten-year notes rise sharply to 3.61% before closing down by -0.06% at 3.494%. The development in yen crosses argues that the three-wave corrective rise since last week is over, considering that GBP/JPY is now back pressing last week's low of 153.43. We'd anticipate some more strength in yen going forward, which might also give the greenback some support.

One of the important factors that could change the above anticipated development is the release of the Conference Board’s consumer confidence report for the US, which is expected to improve to 48 in August. The index bottomed at 25.3 in February, then surged to 54.8 before stabilizing below 50. Stabilization between last month's low of 46.6 and May's high of 54.8 will be welcomed by the markets, but any surprise that swings the reading beyond this range will likely rock the sentiment of investors.

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In most cases, Sterling will continue to be the weaker major currency and might extend recent loses. EUR/GBP has already taken the lead by breaking through key near-term resistance, and then edged higher to 0.8734 and remains firm there. GBP/JPY is back pressing last week's low of 153.43 and might be resuming its recent fall too. GBP/USD had the weakness rebound last week and has taken out an intraday pattern support of 1.6375 in the early European session and might be heading to retest the 1.6274 low.

Newly released economic data saw German GDP finalize 0.3% growth in Q2. The Swiss employment level was basically unchanged at the 3.95M level. The US S&P/Case-Shiller Composite-20 is expected to drop by -16.4% y/y in June. The housing price index in the US is expected to rise slightly by 0.4% m/m in June.

The dollar index's recovery from 77.76 continues today with the 4-hour MACD staying above the signal line. While some more upside might be seen, the short-term outlook remains bearish as long as the 78.67 minor resistance holds. The current fall from 79.51 is possibly resuming the whole decline from the March high of 89.62 and might extend further to 77.43 and below. Nevertheless, strong support is expected above the 75.89 key medium-term level that would finally bring a reversal to conclude the whole fall from 89.62, as well as the medium-term consolidation from 88.46. A break of 78.67 will be an important sign of stabilization and would turn the short-term outlook neutral, while a break of 79.51 will revive the case that the index has already bottomed out at 77.43.

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By the Staff at

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