Good morning

Central Banks take centre stage this week with interest rate announcements. These include: Australia (tomorrow), Australia GDP (Wednesday), Canada (Wednesday), Japan (Thursday), Sweden (Thursday), ECB (Thursday), BOE (Thursday), US Employment Report (Friday). While we are not expecting any fireworks from the ECB (or are we!!), BOE and Japan there could very well be some changes afoot in Australia.

After Gov. Draghi’s speech in Jackson Hole, EU leaders did not explicitly address the question raised by the ECB president, in particular the need to assess the stance of fiscal policy at the euro area level and to better coordinate national policies. It is very likely that Italy and France will support a more flexible approach to the Stability and Growth Pact to support economic activity, a suggestion that was not supported by German Finance Minister last week in Paris. The recent shift of Mario Draghi on that front will likely give more weight to the Franco-Italian position. The new EC president Juncker will also detail his EUR300bn plan for investment, but probably not before December. What we have learned over the past few months is the EU remains on the cusp of another recession and so the need for a greater intervention to prop up the EU zone is now more important than in the past 5 years. Unemployment and wage growth remain severe impediments to the EU, and thus changes to the employment and retirement laws need an urgent fix.

Russia/Ukraine remains a thorn in everyone’s side and the quicker this situation is dealt with the better for the world’s economies. While sanctions are always an alternative, talks are far more encouraging to try diffuse the problem. Russia needs to take a step back and figure out what is good long term and stop with this threat. It does no one any good. Stocks strangely enough have maintained a strong footing, though there is more and more rhetoric (daily) that stocks are overvalued and due a proper correction. While this is possible, as long as the world’s major economies show positive healthy growth levels, it will be hard to find reason to dump stocks when companies are reporting stronger and stronger results. One thing one should fear is just how much traders are leveraging to remain long stocks. This is never a good thing because while the rewards/profits are multiplied when stocks go up, any fall is leveraged and adds to the “collapse”. . US equity markets finished the week higher amid the rally in global government bonds following ECB President Draghi’s nod to potential QE3 at Jackson Hole.

We continue to believe short EURUSD and short EURGBP are the best expressions of EUR bearishness looking for a move towards initial targets near 1.3100 and then 1.3010 in EURUSD. A weekly close below channel support near 0.7950 in EURGBP  (already through today) would confirm a bear flag and signal a move towards the year-to-date lows near 0.7870. Beyond there, we are targeting the 0.7755 greater range lows.

GBPUSD rallied at the open touching 1.6645 before giving back some of the gains (1.6625) after Manufacturing PMI came in at 52.5 from 54.8. While I do not see this as things to come, I suspect that GBPUSD will and should remain elevated especially with the CB meetings due this week.

Good luck and have a great week ahead