Forex - USD Survives G8 and Continues to Strengthen Ahead of BRIC Conference

Forex News and Events: This weekend's G8 conference ended with no real surprises. The final communiqué left the impression that ministers have formed a united front on the need to develop “exit strategies” from unconventional policy measures (however obvious division among countries with respect to individual nations current strategies exist) to head off inflation. While forward looking thinking is always commendable, there is still heated debate on if inflation or deflation will be the end result of the financial crisis (The ECB has forecasted that inflation will turn negative for the region over the coming months but will start to move back toward its 2% target by the end of the year). In addition, there was the customary commitment to shore up confidence, develop a global framework for financial supervision and fight protectionism. And finally was the reference to commodity prices, which used language normally kept for FX stating, "Excess volatility of commodity prices poses risks to growth". There were a few comments (regarding currencies) on the sidelines which were noteworthy given tomorrows BRIC conference. Russia 's Finance Minister, Kudrin, stated that he had confidence in the dollar and that it is too early for alternatives to the USD as the global reserve currency. This comment is a slight pullback from recent anti-USD rhetoric we have been hearing from Russia (and other BRIC countries) and could signal the realization by officials that currently there are no real alternatives. We doubt there will be any call to move away from the USD as the world’s reserve currency, but discussion regarding trade finance and purchase of IMF bonds. Overall there is a shift way from risky assets and USD buying. N. Korean comments that in response to UN sanctions they will begin enriching uranium and plutonium for military usage didn’t help declining risk appetite. Asian regional indexes closed on a softer note while crude prices have rallied slightly currently trading at $71.19. The USD continues to find buyers pushing EURUSD below 1.3900. Another factor giving the USD some support, has been the recent discussion regarding an European banks “stress test”. Both the US and IMF have been pushing for this plan and European official have in principle agreed. However, French Finance Minister Lagarde said that the exact format, such as if it should be on unified or country wide bases, had yet to be determined. In other words, the market will have to wait and uncertainty in the banking sector will linger. Ahead today, US Empire manufacturing survey and TIC figures for June will be released. Markets will also be on the lookout for comments on the USD reserve status ahead of the BRIC conference.

Today's Key Issues (time in GMT): 09:00 EUR Employment growth, % q/q Q1 -0.3 (0.0) prior 12:30 USD Empire manufacturing, index Jun -6.35 exp, -4.55 prior 12:45 USD Fed Governor Tarullo (FOMC voter) speaks on banking 13:00 USD Net long-term foreign security purchases (TIC), $bn Apr 60.0 exp, 55.8 prior 13:30 USD FRB of Chicago President Evans (FOMC voter) speaks on the economic outlook 17:00 USD NAHB housing market, index Jun 17 exp, 16 prior 22:00 USD Fed Governor Duke (FOMC voter) speaks on the Fed's response to the financial

The Risk Today: EurUsd dollar is constructive as focus is now on the financial stability of the Euro zone. We continue to trade sub 1.3900 and next target is at 1.3725 (previous support) as our shoulder on the broad head and shoulder formation finds a double top in 1.4140 – 1.4180 territory. We maintain our bullish dollar stance but see a cap at 1.4042 with an initial resistance at 1.3900. GbpUsd pair remains in a downward channel as it attempts to retrace the broad 2.0194 – 1.3508 move but we still haven’t touched the 50.00% retracement at 1.6851. Initial resistance stands at 1.6400 with a crucial level 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. We are testing crucial support at 98.10, which would see breakout to 97.10. On the upside resistance comes in at 98.57 with a crucial level in at 98.90 which would set the tone for further gains towards 100.00. 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 1.0848 and 1.0750. For now the pair is broadly bullish.

Resistance and Support: EURUSD GBPUSD USDJPY USDCHF 1.4042 1.6524 100.00 1.1032 1.3953 1.6440 98.90 1.0988 1.3900 1.6400 98.57 1.0952 1.3879 1.6346 98.28 1.0892 1.3864 1.6354 98.10 1.0848 1.3800 1.6306 97.50 1.0750 1.3725 1.6243 97.10 1.0650 S: Strong, M: Minor, T: Trendline, K: Keylevel, P: Pivot