Markets Consolidate as Stocks Recovered after Initial Selloff

By: Milla Shaw in Forex Consultant on Aug. 23, 2010

Risk selloff post poor US durables and home sales data was rather brief. DOW once dived sharply to as low as 9937 in early trading but had indeed turned positive in closing. Strong support is still seen around 10000 level. Dollar and yen were largely in range in spite of some intraday volatility. The greenback was still feeling pressure from strength in gold, which extended yesterday’s strong rise through 1240 level. Meanwhile, yen retreated on renewed talk on possible intervention from Japan.

US new home sales dropped sharply by -12.4% in July to annualized rate of 276k, the worst reading since 1963 and way off expectation of 330k. Headline durable goods orders rose a mere 0.3% in July comparing to 3.0% expectation. Ex-transport orders are even worse and dropped -3.8%. The poor data again raised concern that US economy could re-enter into recession.

German Ifo business climate unexpectedly improved from 106.2 to 106.7 in August. Expectations dropped to 105.2 but was better than expectation of 104.3. However, the data provided little boost to Euro. EUR/CHF breached 1.3 psychological level as Ireland’s credit rating was cut one step by S&P to AA- about the increase bank rescue costs. S&P said in a statement that “A further downgrade is possible if the fiscal cost of supporting the banking sector rises further, or if other adverse economic developments weaken the government’s ability to meet its medium-term fiscal objectives.”

Prime Minister Kan and Finance Minister Noda met today while Noda also stepped up the rhetoric, pledging to take “appropriate action” on recent “one-sided” move in the currency. However, markets were again disappointed as nothing concrete was concluded after the meeting. Indeed Noda told reports that the meeting was mainly focused on economic analysis rather than specific address on yen’s rise. Though, it’s believed that BoJ, on the other hand, might be ready to implement additional measures to loosen monetary policy further to ease the negative impact of yen on the export-led economy, in particular if there proves to be sharp deterioration in business sentiment.

AUD/JPY is so far the worst performer this week, dropped over -2%. While this week’s fall was sharp, AUD/JPY is still staying inside recent converging range and is drawing support from the lower trend line. We might still see another rise before consolidations from 71.86 completes and fall from 88.04 resumes. But even in that case, upside should be limited well below 79.41 resistance and bring sharp decline. Meanwhile, break of 72.67 will be an alert that fall from 88.04 is resuming and break of 71.86 low will confirm.

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