Daily Report: Risk Aversion Continues as Markets Await ECB and BoE

Market sentiments continued to be weighed down by situation regarding Ukraine. US equities closed nearly flat with DJIA up 13.87 pts, or 0.08%, at 16443.34 and SP 500 up 0.03 pts, at 1920.24. Asian equities, however, are broadly lower extending the third day of decline. Yen extends the rally against other major currencies. In particular with USD/JPY breaching 102.03 minor support, indicating prospect of further up side. Australia dollar was additionally pressured by the unexpected fall in employment and the sharp jump in unemployment rate. Euro and Sterling recovered against the greenback ahead of ECB and BoE announcement.

Tensions in Russia-Ukraine border intensified with Russia’s Defense Ministry staging a week of military exercises in Russia’s southern Astrakhan region, approximately 500 miles from the border with Ukraine. Meanwhile, Russian President Putin has banned agricultural imports from countries imposing sanctions on Russia. While the list of product bans is not confirmed, it would inevitably affect countries especially those in Europe as Russia is Europe’s largest importer in value of animals, meat, dairy products, fruits and vegetables. Certainly, Russia’s economy would also be affected given goods from the EU represent 16% of all Russian imports. The ban would push inflation of the country to even a higher level.

Released from Australia, unemployment rate jumped sharply from 6.0% to 6.4% in July, hitting a 12 year high. Also, that’s the first time Australian unemployment rate surpassed that of US since 2007. Total employment also unexpectedly dropped -0.3% versus expectation of 13.5k. Full time job rose 14.5k while part-time jobs contracted 14.8k. Participation rate, jumped slightly from 64.7% to 64.8%. RBA maintained its neutral stance earlier this week, signaling interest rates would be kept at the record low of 2.50% for a while.

In China, in the quarterly Monetary Policy Report for 2Q14, the PBOC acknowledged that economic growth was stable in the first half of the year and expected growth would improve in the second half. It also delivered a more hawkish view over inflation and noted the debt levels have risen too fast. On monetary policy outlook, the central bank reiterated its neutral stance. In our opinion, rising inflation concerns might present limitations for the PBOC to adopt aggressive easing while recent improvements in economic data might have reduced the need for doing do. However, more easing measures are still likely as the government struggles to achieve the growth target of 7.5% this year. More in China To Maintain Neutral Monetary Stance, Raised Concerns On Inflation.

The focus of today is ECB’s monetary meeting. While it’s widely anticipated that the members would stand on the sideline in August, we look for Preside Draghi’s addresses over the issue related to the impacts of sanctions against Russia on the Eurozone, as well as the banking crisis in Portugal’s banking sector. The BOE would also leave the Bank Rate at 0.5% and asset purchases at 375B pound on Thursday. The minutes and the quarterly Inflation Report released later this month should give more indications on the monetary outlook. the market is expecting the first rate hike to come in 1Q15.

Elsewhere, Swiss SECO consumer confidence and foreign currency reserves, German industrial production, Canada building permits and Ivey PMI, US jobless claims would be released today.

Daily Pivots: (S1) 0.9305; (P) 0.9339; (R1) 0.9387; More…

Despite recovery to 0.9374, AUD/USD quickly reversed and dropped through 0.9275 temporary low. The development indicates that correction from 0.9504 is resuming. Intraday bias is turned back to the downside. Deeper fall should be seen to 0.9211 support and below. At this point, we’d still expect strong support from 38.2% retracement of 0.8659 to 0.9504 at 0.9181 to contain downside and bring rebound. Near term outlook will stay mildly bearish as long as 0.9374 resistance holds.

In the bigger picture, price actions from 1.1079 are viewed as a medium term correction. Recent development argues that it’s possibly finished at 0.8659 on bullish convergence condition in weekly MACD, ahead of 50% retracement of 0.6008 to 1.1079 at 0.8544. Rebound from there would extend higher to 38.2% retracement of 1.1079 to 0.8659 at 0.9583 first. Sustained break there will confirm this case and target 61.8% retracement at 1.0155 and above. However, break of 0.9080 near term support will dampen this bullish view and would likely extend the correction from 1.1079 to a new low.

AUD/USD 4 Hours Chart

AUD/USD Daily Chart

GMT
Ccy
Events
Actual
Consensus
Previous
Revised
1:30
AUD
Employment Change Jul
-0.3K
13.5K
15.9K
14.9K
1:30
AUD
Unemployment Rate Jul
6.40%
6.00%
6.00%

5:45
CHF
SECO Consumer Confidence Jul

4
1

6:00
EUR
German Industrial Production M/M Jun

1.40%
-1.80%

7:00
CHF
Foreign Currency Reserves Jul

449.6B

11:00
GBP
BoE Rate Decision

0.50%
0.50%

11:00
GBP
BoE Asset Purchase Target

375B
375B

11:45
EUR
ECB Rate Decision

0.15%
0.15%

12:30
CAD
Building Permits M/M Jun

-1.80%
13.80%

12:30
USD
Initial Jobless Claims

305K
302K

14:00
CAD
Ivey PMI Jul

54.1
46.9

14:30
USD
Natural Gas Storage

88B

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