Risk Aversion Dominated Markets, Dollar Broadly Higher

Risk aversion dominated the market last week on a couple of factors including concern over China's recovery, free fall in precious metals and Boston marathon bombing. DOW ended the week over -300 pts lower to close at 14547.5. Gold dropped further to as low as 1321.5 before recovering to close barely above 1400 at 1407. In the currency markets, commodity currencies were the worst performers with AUD/USD and NZD/USD down over -2% while EUR/AUD and EUR/NZD was down over -1.5%. Yen jumped sharply in the early part of the weak on risk aversion but then weakened back as Japan avoided criticism from G20. European major also weakened against the greenback even though the weakness was relatively limited comparing to commodity currencies. Among European majors, Sterling was the weakest one as it was sold off towards the end of the week after Fitch lower UK's credit rating to AA+, down from AAA with a stable outlook.

Technically, we'd like reiterate our favored viewed on yen crosses. That is, we're viewing last week's sharp fall and subsequent rebound as part of consolidation pattern. And such consolidations are expected to continue with one more more before the larger up trend resumes. Hence, we'd expect current rebound to be limited by prior week's high and bring a near term reversal. That is, 99.94 in USD/JPY, 131.12 in EUR/JPY, 153.86 in GBP/JPY, 105.42 in AUD/JPY and 98.97 in CAD/JPY. Those levels would likely remain intact. Hence, we'd prefer not to join the rally in yen crosses unless we see decisive break of these levels in at least two crosses.

Regarding European majors, we'd like to point out that EUR/GBP's rebound last week was an indication of near term strength. And we'd expect sterling to underperform Euro. EUR/CHF would stay in range and thus there shouldn't be any difference between Euro and Swiss Franc. Against commodity currencies, EUR/AUD and EUR/CAD showed some sign of strength last week. However, against dollar, Euro's rebound from 1.2746 lost much momentum last week and outlook is rather mixed in near term. The rebound in USD/CHF also raised concern that EUR/USD might have topped. So, European majors would possibly remain mixed this week, being soft against dollar and firm against commodity currencies. So, we'd prefer to avoid them.

Technical development in commodities against dollar somewhat turned bearish last week. USD/CAD's rebound indicates that recent pull back from 1.0341 has completed at 1.0083. AUD/USD's rebound from 1.0115 could also be finished at 1.0581. NZD/USD's fall from 0.8675 also accelerated last week and suggested deeper decline lies ahead. Among the commodity currencies, AUD/NZD suggests that Aussie would likely underperform Kiwi. Development in AUD/CAD also suggests that Aussie would underperform Loonie.

So considering all factors, we'd prefer to short AUD/USD this week. But there, we'd be cautious on reversal and keep our stop tight at 1.0397 resistance.