Mid-Day Report: Markets Consolidate in Quiet Trading

The forex markets are rather quite today and no inspiration was provided by the light economic calendar. Eurozone consumer confidence deteriorated to -11 in September. US existing home sales dropped to 5.05m annualized rate in August. Both triggered no reactions from the markets. After the roller coaster rides last week, markets would probably have much lower volatility this week. Nonetheless, the Aussie is the clear loser as the week starts and could face some more pressure from China economic data ahead.

ECB president Mario Draghi told the economic and monetary affairs committee of the EU parliament that risks to the Eurozone economy are “clearly on the downside” and recent indicators gave “no indication” of sharp decline is slowing. He added that the central bank is ready to use more unconventional tools too boost inflation and growth. He emphasized that ECB “remains fully determined to counter risks to the medium-term outlook for inflation”. ECB governing council member Ignazio Visco said over the weekend that the central bank was ” bold enough to reduce interest rates to a level that was unexpected to the market.” and there may not be a “next step”. recent fall of Euro’s exchange rate was the “right response” and with that, ECB might not need to add stimulus. Meanwhile, he said there was “misunderstanding” about TLTROs as a failure. He noted that the “second tranche” is more important than first and some banks postponed borrowing until December.

The Japanese yen continues to be one of the weakest currencies this month. OECD Acting Chief Economists Rintaro Tamaki urged said they assumed Japan’s consumer inflation won’t hit the 2% target in a “stable manner” in Spring of 2015. And he urged BoJ to “commit to maintaining monetary easing beyond that as early as possible, considering the next tax hike in October 2015.” He also noted that while Yen’s depreciation would help exports, there was not much room for growth unless the global economy stages a solid recovery. Separately, ex-BoJ deputy governor Kazumasa Iwata said the weakness in yen is “slightly excessive”. He noted that USD/JPY at 90-100 is the appropriate level for reflection the economic fundamentals.

Over the weekend, BoC governor Stephen Poloz talked down the significance of the higher than expected inflation number in August. He said “so much of the uptick in inflation that we’ve seen over the last five or six months has been in what we call one-off categories.” And he emphasized that the Canadian economy has a “significant amount of room to grow”. And he also added that “the idea is to get the economy back to normal, and then inflation would be sustainably at target, not just accidentally.”

The Australian dollar is clearly lower today on concerns of slow down in China. China’s Finance Minister Lou Jiwei stressed that further stimulus is unlikely despite disappointment seen in individual economic indicators. That said, the PBOC cut the interest rate on 14-day repo agreements by -20 bps last week, following a -10 bps reduction in July. The move signaled that the central bank has become more determined to ease the monetary policy as economic growth moderates. An important event for Aussie is the HSBC China manufacturing PMI to be released in the coming Asian session.

New Zealand dollar was mildly higher today after Prime Minister John Key got a record election victory and returned to power. Nonetheless, the strength quickly faded as the Kiwi reversed earlier gains as recent consolidation continues. Key’s National Party won 48 of vote in the ballot over the weekend and secured the first single party majority in the parliament since introduction of proportional representation back in 1996. Finance minister Bill English said that “a third term is critical for embedding the direction and increasing growth potential.”

Daily Pivots: (S1) 1.2797; (P) 1.2862 (R1) 1.2896; More….

Intraday bias in EUR/USD remains on the downside for the moment. Current decline from 1.3993 will target 1.2755 key support level. Decisive break there will target 1.2042 low next. On the upside, break of 1.2994 will indicate short term bottoming and bring stronger rebound before staging another fall.

In the bigger picture, overall price actions from 1.6039 long term top is viewed as a corrective pattern. Fall from 1.3993 is tentatively viewed as the third leg of such pattern. Break of 1.2755 support will pave the way from 1.1875 low and below. Even in case of a rebound, we’ll stay bearish before firm break of 55 days EMA (now at 1.3228).

EUR/USD 4 Hours Chart

EUR/USD Daily Chart

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