Markets are still taking about two things in early US session. Firstly, slow down in China's growth. Secondly, Fed might refrain from adding introducing additional quantitative easing measures in today's announcement. Dollar is sharply higher against major currencies with the dollar index holding well above 81 level now. Crude oil drops back to below 80 level while Gold breaks 1200 on dollar strength while US stocks futures are pointing to a lower open. it still early to call for a reversal in recent weakness in dollar. But a short term bottom should at least be made and we'd favor more upside in the greenback for the rest of the week at least.

Two pieces of data from China triggered continue of deeper slowdown in recovery and sent Asian stocks lower today. Firstly, China import growth slowed sharply from 34.1% to 22.7% in July while exports growth also slowed from 43.0% to 38.1%. Secondly, investment in real-estate developments slowed from 46.3% yoy to 33.0% yoy in July. China stocks were down -2.89% and dragged Asian equities all lower. Nevertheless, the news seemed to have little impact on European markets as major indices are mixed only.

Data from US saw non-farm productivity dropped -0.9% in Q2 while unit labor costs rose 0.2%. Focus of the upcoming FOMC meeting is whether the Fed announces to enter the next phase of QE, i.e. to purchase assets to maintain or expand the size of the balance sheet. Although recent US economic indicators have surprised to the downside and speculations of QE intensified after Friday's payroll report, we do not expect the Fed to announce anything new other than a more dovish statement at Tuesday's meeting. While the upcoming meeting may lack a shift in policy, the Fed should deliver a more dovish statement. We expect the central bank to acknowledge that the pace of recovery has slowed and risks of growth are to the downside. Policymakers are anticipated to show concerns about economic outlook while growth projections will remain unchanged until November. More in FED Unlikely to Announce QE Plans in August.

BoJ left rates unchanged at 0.1% as widely expected. The banks said in the statement that Japan's economy shows further signs of a moderate recovery, induced by improvement in overseas economic conditions. The employment and income situation has remained severe, but the degree of severity has eased somewhat. On deflation, the bank said that based on the assumption that medium- to long-term inflation expectations remain stable, the year-on-year rate of decline in the CPI (excluding fresh food) is expected to slow as the aggregate supply and demand balance gradually improves.

Other data released today saw UK RICS House Price Balance dropped to -8% in July, first negative reading in a year. Swiss SECO consumer confidence rose to 16 in July. German CPI was revised higher to 0.3% mom, 1.2% yoy in July. UK trade deficit narrowed to GBP -7.4b in June. DCLG house price rose 9.9% yoy in June. Canada housing starts dropped slightly to 189k in July while new housing price index rose 0.1% mom in June.

Dollar index's rebound extends further to as high as 81.38 in early US session. As noted before, a short term bottom is in place at 80.08 after missing 80 psychological level, on bullish convergence in 4 hours MACD. Further rise should be seen for 82.08/83.45 resistance zone. Decisive break of this resistance zone will reaffirm our original view that fall from 88.70 is merely a correction to medium term rally from 74.19 and should be contained by 80 level. Break of 83.45 will target 88.70 high next. However, note that another sell off in dollar will probably push the dollar index through 80 psychological level. Sustained trading below 80 psychological level will indicate that fall from 88.70 is part of a wide range sideway pattern from 70.70 and will target lower trend line support at 75.60 level.


USD/CAD Mid-Day Outlook

Daily Pivots: (S1) 1.0250; (P) 1.0274; (R1) 1.0294; More.

USD/CAD rises further to as high as 1.0384 so far today. At this point, intraday bias remains on the upside and further rally should be seen to upper trend line resistance (now at 1.0512). On the downside, below 1.0305 will turn intraday bias neural and bring retreat. Nevertheless, note that a short term bottom is formed at 1.0106 on bullish convergence condition in 4 hours MACD. Hence, another rise would remain in favor as long as 1.0106 support holds.

In the bigger picture, while the decline to 1.0106 was sharp and deep, USD/CAD managed to drew support from 1.0109 and is still staying in range of 1.0109/0851. It's still possible that recent price actions from 1.0734 are consolidative in nature. A break above 1.0675 will signal that such consolidation is completed and will target another high a above 1.0851. However, a break below 1.0106 will indicate that 0.9929 is not the medium term bottom yet. Though, considering bullish convergence conditions in daily and weekly MACD, we believe that medium term decline from 1.3063 is going to reverse soon, probably after a brief break of 0.9929 low. Hence, focus will be on reversal signal even in case of another fall.