Dollar and yen climbed earlier today on renewed concern on Eurozone banking sector and disappointing Chinese manufacturing data. Dollar index breached recent high of 87.46 briefly but lacked follow through momentum to sustain above this level. Canadian dollar had little reaction to BoC rate hike as the statement suggests that today's hike might be a one-off. WTI crude oil dipped to as low as 71.64 before recovering while gold extended recent rebound to as high as 1227.7. Major European stock indices are down over -1.5% at the time of writing.

There are fresh concerns of Eurozone's debt crisis after ECB warned that banks in Eurozone are facing as much as EUR 195b in write-down this year and next. In the semi-annual financial stability report, ECB acknowledged that banks have made significant improvement in their financial situations already. However, there are still two important risks to financial stability. Firstly, it's persistence or even intensification of sustainability of public finance. Secondly the is possibility of adverse feedback between the financial sector and public finances. Papdemos warned that downside risks to growth could increase and there is no room for complacency.

While Euro was weak, Sterling remained firm so far today, with help from solid economic data as well as weakness of EUR/GBP. PMI manufacturing was unchanged at 16 year high of 58. According to Land Registry report, home prices rose 8.5% yoy from a year earlier, the fastest pace since September 2007.

Bank of Canada raised overnight rate target by 25bps to 0.50% today. Meanwhile, the bank also reestablished normal operating band of 50bps pts for the overnight rate with bank rate raised to 0.75% while deposit rate is kept at 0.25%. BoC acknowledged the robust 6.1% growth in Q1 but expect household spending to decelerate going forward. Inflation is inline with BoC's projection. BoC said that the move today will still leave considering monetary stimulus in place but warned that further reduction of monetary stimulus would have to be weighed carefully against domestic and global economic developments.

Earlier RBA left its overnight cash rate unchanged at 4.5% as previous rate hikes have brought interest rates to average levels of the past decade and the central bank needs to gauge impacts of European policymakers' measures to contain sovereign crisis. There was no discussion on when the central bank will resume tightening. The RBA only said it viewed the current setting of monetary policy as 'appropriate for the near term' with previous rate hikes bringing interest rates to around 'average'.

China manufacturing data was a disappointment for Asian investors. Manufacturing PMI dropped more than expected to 53.9 in May suggesting the manufacturing sector is slower more than anticipated. This also raised concern that the strong economic expansion in China is held back. Also, sentiments are somewhat weighed down by speculation that China is going to launch a property tax trial in some provinces to cool the real-estate bubble.

Data released today saw Eurozone unemployment rate climbed to 12 year high of 10.1% in April, manufacturing PMI was revised slightly lower to 55.8 in May. German unemployment rate dropped to 7.7% in May and unemployment dropped more than expected by -45k. Swiss SVME PMI unexpectedly rose to 66.4 in May, GDP rose 0.4% qoq, 2.2% yoy in Q1. UK PMI manufacturing was unchanged at 58 in May. Australian retail sales rose more than expected by 0.6% mom in April, but building approvals dropped -14.8% mom in April.

Intraday bias in dollar index is cautiously on the upside for the moment and sustained trading above 87.46 will confirm up trend resumption for 2009 high of 89.62. However, note that break of 86.54 minor support will in turn argue that consolidations from 87.46 is still in progress and another fall would then be seen to 85.14 support before conclusion. Though, we'd still expect downside to be contained by 38.2% retracement of 80.04 to 87.46 at 84.62 and finally bring up trend resumption.

AUD/USD Mid-Day Outlook

Daily Pivots: (S1) 0.8388; (P) 0.8451; (R1) 0.8520;

AUD/USD's break of 0.8323 minor support suggests that recovery from 0.8066 has completed at 0.8549 already. Intraday bias is flipped back to the downside for 0.8066 low first. Break will confirm down trend resumption towards 0.8 psychological level next. On the upside, above 0.8549 will bring another rise. But after all, we'd expect strong resistance at 0.8715 (50% retracement of 0.9380 to 0.8066 at 0.8723) to limit upside and bring fall resumption finally.

In the bigger picture, while the decline from 0.9380 is steep, it's still treated as a correction to medium term up trend from 0.6008. Hence, we're expecting strong support from 0.7702 (50% retracement of 0.6008 to 0.9404 at 0.7706), at least initially, to bring rebound. But after all, decisive break of 0.8715 support turned resistance is needed to indicate that fall from 0.9380 is completed. Otherwise, more downside would remain in favor.

Economic Indicators Update

GMT Ccy Events Actual Consensus Previous Revised 01:30 AUD Retail Sales M/M Apr 0.60% 0.40% 0.30% 01:30 AUD Building Approvals M/M Apr -14.80% -5.20% 15.30% 04:30 AUD RBA Interest Rate Decision 4.50% 4.50% 4.50% 05:45 CHF GDP Q/Q Q1 0.40% 0.70% 0.70% 0.90% 05:45 CHF GDP Y/Y Q1 2.20% 1.80% 0.60% 06:00 EUR German Retail Sales M/M Apr 1.00% 0.80% -2.40% -1.60% 07:30 CHF SVME-PMI May 66.4 64.4 65.9 07:55 EUR German PMI Manufacturing May F 58.4 58.3 58.3 07:55 EUR German Unemployment Change May -45K -18K -68K -67K 07:55 EUR German Unemployment Rate May 7.70% 7.80% 7.80% 08:00 EUR Eurozone PMI Manufacturing May F 55.8 55.9 55.9 08:30 GBP PMI Manufacturing May 58 57.8 58 09:00 EUR Eurozone Unemployment Rate Apr 10.10% 10.10% 10.00% 13:00 CAD BoC Interest Rate Decision 0.50% 0.50% 0.25% 14:00 USD ISM Manufacturing May 59.4 60.4 14:00 USD ISM Prices Paid May 72.5 78 14:00 USD Construction Spending M/M Apr 0.00% 0.20%