• It is desirable for currencies to move in a stable manner reflecting fundamentals
• Excessive volatility increases uncertainties, reduces predictability for businesses
• No change to Japan’s economic outlook despite recent market volatility
• Closely monitoring financial markets with a sense of urgency, and also calmness

A 2,000 pips range in a span of a month is probably more than what Tokyo bargained for when they decided to intervene in July. There is a calmer mood in markets right now but it doesn’t mean that volatility has died down. It will take a while for fears to abate further, provided that there aren’t any more shocks along the way. In that lieu, do be mindful of the US weekly initial jobless claims tomorrow as one a potential trigger on the economic calendar.

This article was written by Justin Low at www.forexlive.com.

• It is not a reaction to fundamental issues with the economy
• If confidence in slowing trend of inflation strengthens, rate cuts can continue
• The path to inflation target is still bumpy

Even so, a repeat of the Friday and Monday rout in markets risks further tightening in financial conditions and could still prompt central banks into action. Or at least traders will wish for that to happen amid more kicking and screaming to come, that is.

This article was written by Justin Low at www.forexlive.com.

• Market index 215.1 vs 201.2 prior
• Purchase index 133.9 vs 132.8 prior
• Refinance index 661.4 vs 570.7 prior
• 30-year mortgage rate 6.55% vs 6.82% prior

The average rate of the most popular US home loan took a plunge last week after the drop in yields on Friday, alongside signals from the Fed to cut rates. The massive plunge is enough to get mortgage applications back up with both purchasing and refinancing activity also climbing.

This article was written by Justin Low at www.forexlive.com.

The weak US NFP report last Friday triggered risk-off flows.
Things got dire on Monday as the Japanese Nikkei dropped 12% overnight and we
saw a general selloff in global stock markets.

At one point, the markets
saw the Fed cutting rates by 136 bps by year-end and some chances of an
emergency rate cut. Although the volatility calmed down a bit and markets
recovered the Monday’s losses, the expectations haven’t changed much as the
market is still pricing a higher probability for a 50 bps cut by the Fed in
September and a total of 103 bps by year-end.

The GBP gained against the
USD on Friday due to the aggressive rate cuts pricing for the Fed but
eventually gave way to the greenback as the risk-off intensified on Monday
morning. We had another selloff on Tuesday morning although there wasn’t any
clear catalyst. The sentiment is still fragile, and flows are dominating the
price action.

GBPUSD
Technical Analysis – Daily Timeframe

On the daily chart, we can
see that GBPUSD dropped below the major trendline and extended the selloff into the
1.2677 level as the bearish momentum increased. The natural target for the
sellers should be the swing low level at 1.2615.

If the price gets there, we
can expect the buyers to step in with a defined risk below the level to
position for a rally into new highs. The sellers, on the other hand, will want
to see the price breaking lower to increase the bearish bets into the 1.25
handle next.

GBPUSD Technical
Analysis – 4 hour Timeframe

On the 4 hour chart, we can
see that we have a downward trendline defining the current bearish momentum.
The sellers will likely keep on leaning on it to position for further downside,
while the buyers will want to see the price breaking above the trendline to
regain some control and pile in for new highs.

GBPUSD Technical
Analysis – 1 hour Timeframe

On the 1 hour chart, we can
see that we have a decent resistance
around the 1.2720 level where the price got rejected from several times. The
buyers will want to see the price breaking higher to position for a rally into
the downward trendline. The sellers, on the other hand, will likely lean on it
to position for a drop into the 1.2615 level. The red lines define the average daily range for today.

Upcoming
Catalysts

This week is basically empty on the data front. The only notable economic
releases will be on Thursday when we get the latest US Jobless Claims figures.
The market will also pay close attention to Fed members’ comments given the
latest developments in the markets.

This article was written by Giuseppe Dellamotta at www.forexlive.com.

The idea of the dollar smile theory is pretty much this:

But amid the unwinding of the carry trade since Friday, there is something worth noting about the dollar under these circumstances. The global selloff proved that even with risk aversion in markets, the dollar struggled for the most part. So, what gives?

As the boom meets a bust, traders are getting a reality check. The carry trade mostly depended on this one thing. Traders were borrowing yen at low interest to buy risky assets i.e. US stocks mostly. That’s the simplest way to put it. So, the BOJ hiking rates plus the yen surging led to a double whammy which shook markets since Friday.

That is not to mention with all the panic surrounding the state of the US economy with markets suddenly wanting to believe that the Fed has to step in with emergency rate cuts. Pfft.

So, looking at the state of things, markets are now figuring out the one thing that can really hurt it the most. And that is when leverage gets out of control and come back to bite at investors.

A flight to safety during such an event typically should bolster the dollar’s standing but considering the circumstances, the dollar seems to be the one caught on the opposite side of the unwinding too. It doesn’t help when the solution for investors is to go kicking and screaming, and asking help from the Fed.

Taking that as a case in point, the dollar smile theory may yet have changed to a dollar frown theory – at least for now:

That being said, with the Fed poised to cut rates, it will also keep a lid on any outsized dollar rally from hereon. But a more robust economy in general will at least keep the dollar in good standing and not exercise the Fed put too quickly.

But if other parts of the economy start to show more warning signs like the labour market, the dollar might quickly find itself in hot water once again.

And to pile on the misery, it will also trigger worries about the outlook for US stocks. In turn, that might bring us back to the episode from last Friday and this Monday again. That especially if USD/JPY also continues to plunge alongside a declining equities market.

In the normal case of risk aversion, the dollar is a comfort for traders in general. But when we’re now caught in the storm of the carry trade unwind, the dollar really needs a strong economy to work for it in order to stand its ground.

This article was written by Justin Low at www.forexlive.com.