USD/JPY is a little lower after the Tankan came in slightly better than predicted. The big manufactures index showed the first improvement in 8 quarters.

After the huge stimulus spending of the last six months, that’s not really what we had hoped to be hearing. The problem in Australia is that the economy is very open and the funds flow out easily. The AUD/USD is slightly firmer this morning, being dragged higer by some profit taking in cable and EUR/USD.

Normally we expect to hear one announcement a year out of China on some small administrative change or other which has no impact on anything. It seems the winds of change are whipping the communist regime into a frenzy of change, with now two announcements in two days. Yesterday was the news that HK companies can start dealing with their counterparts in 5 Chinese cities in CNY, perhaps the next step in the internationalisation of the CNY. Today, the WSJ reports that Taiwan is opening its doors to investment from mainland Chinese companies. Money talks!

EUR/USD is drifting higher in a relatively tight range dictated to by option plays. Therefore, if we know where EUR/GBP is going, we should be able to get a good handle on the cable.

The medium term trend is still bearish. The short-day MAs have had a mildly bullish cross which indicates a period of consolidation but there is as yet no sign of a bottoming pattern emerging. A short term base is in place at .8400 and the solid bearish trendline now around .8660 should provide excellent resistance. Look to play this range until further information arrives.

In case you haven’t read it already, here is an article on Bloomberg with the talk of ’sterling crisis’ which was enough to get traders thinking about why they were sitting long sterling. My guess is that the only reason for being long was “because it’s going up Guv’nor”.

Heavy stops are tipped in the cable below 1.6410 but the buying interest around 1.6420/40 looks pretty solid. My tendency today, after such a big fall overnight, is to trade with a bearish bias. My trading range for the Asian session is 1.6420/1.6545.

Lots of volatility, particularly in the sterling, as heavy flows ahead of the upcoming US holiday weekend and for balancing at the end of the first 6 months (as well as financial year end in some centres) ensured lots of movement. I’m not reading too much into it just yet. EUR/USD remains well supported on dips and the short term trend is up, so don’t be selling mid-stream, wait for rallies. Cable saw lots of break buying above 1.6660 and these longs have probably now been cut- it still seems to be in an uptrend but we need to keep a close eye on what EUR/GBP does. The USD/JPY buying on dips towards 94.75/95.25 is said to be particularly large but I’m sure the selling will be equally so on any decent rallies. This pair is in a range. The AUD is overvalued in my opinion and while it may struggle a bit higher against the USD, I’m still a seller on rallies at these levels.

Good luck today.

• Case Shiller home price index falls 18.1% y/y in April; rate of decline slows
• Chicago PMI rebounds to 39.9 in June, slightly better than expected
• US consumer confidence falls to 49.3 in June from 54.8 in May
• World Bank chief Zoellick: Global financial markets have arrested their fall but crisis far from over
• Fed’s Bullard: Policy to stay very loose for a while but important to articulate exit strategy to avoid hurting inflation expectations.
• Canadian GDP -0.1% in April, declining at slower rate
• US equities close down 0.9%, oil closes at $70, down $1.50 after trading to trend highs overnight at $73.38.

The dollar fell to its lowest level of the year versus the pound at 1.6744 and EUR/USD rallied to three week high at 1.4154 before reversing course during the US morning session.Reports of very heavy selling above the 1.4100 level by a US investment bank (upwards of EUR 700 mln helped turn EUR/USD lower. After consolidating a while in the 1.4070/80 region rumors made the rounds that there were upwards of EUR 4 bln to be sold at the month-end fixing. True or not, it was “sell first and ask questions later”. EUR/USD fell as low as 1.4002 before steadying. Reports of buying from Asian regional central banks near the lows made the rounds.

Significantly, EUR/USD held above key support at the 1.3980/90 level and GBP/USD held onto 1.6425 support, though it did post a bearish outside day key reversal. The US dollar index also posted a key reversal on the charts, defined as, in the case of the dollar index (reverse it for cable) a lower low on the day followed by a higher high than the previous day and a close above the prior day’s close.

USD/CAD continued to go its own way, strengthening above 1.1600, reaching 1.1640. AUD/USD gave back overnight gains as the reflation trade was unwound a bit at month, quarter and half-year end .It ended at 0.8060 after dipping as low as 0.8040 from morning highs at 0.8155.

In the time it takes to complete the paper work for planning permission in Britain, a factory in Tianjin has been built and is producing passenger jets. Latest from AEP at The Telegraph.

CFTC official Chilton tells Reuters that “something is going on in these markets”, refering to commodities, “and it’s our job to make sure it’s nothing illegal”. Special attention is being given to oil, Chilton says.

Not to fear, the government is here!

Oil closed the pit session off its lows, recouping about 0.70 cents or 1% in the last hour. We now stand at $69.95. Stocks have trimmed losses as well. now down 1% versus a 1.4% loss earlier in the afternoon. The dollar index is easing a touch as the reflation trade fares a bit better late in the day. The biggest component of the index, EUR/USD is at 1.4037 while USD/JPY eases to 96.32 after stalling just shy of 96.50. Cable is at 1.6460 as support at 1.6425 firms up after a test late in London.

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