• Market declines accelerate in early Tuesday trade
  • Higher China inflation data contributes to additional risk selling
  • Commodity currencies smashed, with Aussie breaking below parity
  • Gold surges to yet another fresh record high
  • Swiss Franc also well bid on safe-haven currency flows
  • Investors desperately looking for stabilizing mechanism
  • All eyes on critical FOMC event risk due later today

After yet another disastrous session on Wall Street in Monday trade which saw US equities tumble by more than 5%, and oil prices collapse to $80, one would think that early Asia might have been the ideal spot for some form of a consolidation before considering the next major moves. Instead, the panic and fear only intensified, with Asian equities getting slammed and US equity futures and oil prices extending their declines once more. It was therefore no surprise to see the choice safe haven asset once again rallying to yet another fresh record high, with gold prices looking poised to test next major psychological barriers by $1800. A gold test of the $2000 level seemed unfathomable only a few days back, and yet here we are, with the market only a stone’s throw away from the massive psychological barrier.

An added contributor to this most recent bout of risk liquidation has come from China, with the still hotter than expected CPI data opening the door for yet another global growth negative strain from the major economy, which will certainly infect the other major economies. China has already shown signs of cooling, and the recipe of slower growth and higher inflation in this environment is nauseating at best. The commodity bloc currencies have been hammered as a result, with Aussie, Kiwi and Cad all extending their respective declines against the USD.

The Australian Dollar has been the hardest hit, with the market trading back below parity after having traded to fresh post float/multi-decade highs only a few days back; a dramatic 10 plus big figures higher at 1.1080. We had certainly been warning of the current pullback and the China news in conjunction with a less hawkish RBA and slowing economic data within Australia, all added to an even greater sense of panic and need to liquidate long Australian Dollar positions. Already on Tuesday, Commonwealth Bank of Australia has slashed its fixed rate mortgage rates, while home loans, business conditions and investment lending data have all disappointed.

Additional record Swiss Franc levels have naturally been recorded amidst the chaos, although it is worth noting that considering this latest wave of massive risk liquidation, the relative strength in the Franc has been unimpressive. We would therefore extrapolate that some form of coordinated intervention to curb additional strength in the Franc (and Yen as well) may already be underway, and considering just how wildly overextended the Franc has become, any currency safe-haven flows going forward could start to be more of a benefit to the undervalued US Dollar.

As far as intervention and official action are concerned, we had already seen some comments from the G7 and G20 on Monday, and things have gotten out of control to the point that some measures may very well be taken over the coming hours to help resuscitate or even stabilize the markets. One such action could come from the Fed later today, with investors now ironically looking for more artificial stimulus in order to obtain a (false) sense of security. Talk of QE3 has been rampant and we fear that if markets start to expect delivery from the Fed on this front, the central bank may be forced to appease investors in some form or another to avoid a much scarier alternative.

We must also not forget that fears from the latest S&P downgrade to US credit ratings have spread over to Europe, where France is now at risk for a potential ratings downgrade. A downgrade to France would be devastating for the Eurozone economy, as it would seriously undermine credibility of the EFSF. Looking ahead, things have spiraled so far out of control in early Tuesday trade, that we would expect to see some form of a catalyst to at least inspire some consolidation over the coming hours ahead of the FOMC rate decision. Eurozone, Swiss and UK data releases are due out, but should have no real influence on market price action which will continue to be dominated by more pressing global macro themes.

ECONOMIC CALENDAR

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TECHNICAL OUTLOOK

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EUR/USD: The market continues to adhere to a bearish sequence of lower tops since May, with a fresh lower top now in place by 1.4535 ahead of the next downside extension back towards and eventually below 1.4000. In the interim, look for any intraday rallies to be well capped ahead of 1.4350, while only back above 1.4450 delays.

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USD/JPY: Setbacks have stalled out just ahead of the 76.25 record lows from March, with the market dropping to 76.30 ahead of the latest reversal. The bounce is somewhat significant on a short-term basis, with the market showing just how well it is supported down by 76.00. Given that we are seeing the rate by record lows, we would not at all be surprised to see the formation of a material base in favor of significant upside back towards the 82.00 area over the coming sessions. However, the overall structure still remains bearish and it will take a break back above 80.00 to officially alleviate downside pressures and confirm reversal prospects. Below 76.25 negates.

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GBP/USD: Despite the latest rally back above 1.6400, the market still remains locked in a broader downtrend off of the April highs, and a fresh lower top is now sought out somewhere ahead of 1.6550 in favor of the next downside extension back towards the recent range lows at 1.5780. Ultimately, only a break back above 1.6550 would delay bearish outlook and give reason for pause, while back under 1.6220 should accelerate declines.

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USD/CHF: Despite the intense downtrend resulting in recently established fresh record lows below 0.7500, short/medium/longer-term technical studies are looking quite stretched to us, and we continue to like the idea of taking shots at buying in anticipation of a major base. Still, at this point, fading this trend will require some upside confirmation and we would look for a break back above 0.7800 at a minimum to open the door for these reversal prospects and alleviate immediate downside pressures.

Written by Joel Kruger, Technical Currency Strategist

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