Focus Back To US Data And Central Banks As Syria Threat Receded

Geopolitical tension in Syria was the main theme in the markets last week. Worries over an imminent strike sent equities market lower and boosted safe haven flow to crude oil and gold. The DOW dropped to as low as 14760.41 while crude oil jumped to as high as 112.24. Gold also jumped to 1434.0. Yen tried to strengthen broadly on risk aversion in the currency markets while the dollar was generally mixed. Nonetheless, as the risk of an attack faded, markets pared some of the earlier moves towards the end of the week. The latest news was that the U.S. Secretary of State John Kerry pledged to have a "diplomatic process" with Syria. Market focus will likely turn back to economic data from U.S. this week, as well as a number of central bank meetings.

Technically, the whole DOW ended the week on a low note closing at 14810.31, as downside momentum seemed to be diminishing in the intraday charts. Secondly, U.S. treasury yields extended their recent retreat and a weakness was seen particularly towards the long side with 30-year yield dropping further to close at 3.676%. Crude oil, despite the spike, closed back into recent range indicating a lack of follow through buying. Fourthly, the dollar index had indeed staged a strong rally on Thursday and closed the week with a strong note at 82.14.

In the currency markets, in spite of the pull back towards the end of the week, the yen still ended the week as the strongest currency. Recent development favors more downside in yen crosses in general. But we'd hesitate to commit to yen longs because current price actions are viewed as part of the medium term consolidation pattern, which could be quite unpredictable.

The dollar was the second strongest currency last week next to the yen. The Dollar Index's break of 55 days EMA indeed indicates near term reversal. The EUR/USD's break of the 1.32 level last week also affirmed the view of more dollar strength in near term. However, we'd like to point out that AUD/USD has much risk of trend reversal even if a new low below 0.8847 cannot be ruled out. A similar risk of reversal could be seen in the EUR/AUD too. The USD/CAD should be able to get through 1.0608 resistance on rally resumption. Strong resistance might be seen above 1.0656. Looking at the EUR/GBP, in spite of the intra-week rebound to 0.8652, the cross quickly weakened again and the development affirmed the near term bearish outlook for 0.84 level.

Hence, we'd prefer to short EUR/USD this week for short term trades back to 1.3 and below. Though, we'll keep the stop tight at around 1.33 level. For medium term trades, we'll try to find opportunities to sell the EUR/AUD at a new high and buy the AUD/USD at a new low.