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Risk Remains Bid, But US Data Key

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Top Stories

  • Chinese PMI drops below 50 for first time in 17 months
  • UK PMI bit better 57.3 vs. 57.1 eyed
  • Asia up mildly, Nikkei up 0.33% Europe kicks off on postive note
  • Oil back above $79/bbl
  • Gold at $1180/oz.

Overnight Eco

  • AUD AIG Manufacturing Index 54.4 vs. 52.9
  • AUD MI Inflation Gauge m/m 0.1% vs. 0.3%
  • AUD HIA New Home Sales m/m -5.1% vs. 6.4%
  • AUD Commodity Prices y/y n/a
  • JPY Average Cash Earnings y/y 1.5% vs. 0.7%
  • NZD ANZ Commodity Prices m/m -0.8% vs. -1.6%
  • CHF Retail Sales y/y 0.9% vs. 1.4%
  • CHF SVME PMI 66.9 vs. 64.9
  • EUR Final Manufacturing PMI 56.7 vs. 56.5
  • GBP Manufacturing PMI 57.3 vs. 57.1

Event Risk on Tap

  • USD ISM Manufacturing PMI expected at 54.3
  • USD Construction Spending m/m expected at -0.4%
  • USD ISM Manufacturing Prices expected at 55.3

Price Action

  • USD/JPY recovers off Friday'a multi month lows to trade 86.70
  • AUD/USD runs to .9100 as risk recovers and PMI Manufacturing helps
  • GBP/USD runs to 1.5800 as relatively strong UK PMI supports
  • EUR/USD upward revison in PMI helps but 1.3100 remains out of reach for now

Risk FX remained well bid on the first trading night of the week despite weaker Chinese PMI Manufacturing data that showed the first contraction in the index in 17 months. The HSBC Manufacturing gauge printed at 49.4 versus 50.4 the period prior. The official PMI reading issued on Sunday saw a more modest decline to 51.2 from 52.1 in June. The data confirmed market expectations that Chinese economy is slowing as officials try to curb the country's real estate boom and curtail bank lending.

The currency markets however blissfully ignored the data, and were boosted by better than expected readings from other economies in the region as well as strong PMI results from the Eurozone. In Asia, PMI readings from Taiwan, Korean and Australia all remained in expansionary territory with Australian AIG Index especially impressive at 54.4. versus 52.9 the month prior. The Aussie catapulted above the .9100 level for the first time since the start of May despite the fact that RBA is expected to remain stationary tomorrow on the interest rate front. The unit is being elevated by much better risk appetite flows over the past week as fears of a double dip recession in the second half of the year continue to evaporate.

In Europe, the surprisingly strong reading from the Swiss PMI which came in at 66.9 versus 64.9 expected, spurred speculation that the SNB may begin to move away from its ultra easy monetary policy as early as the start of next year and raise rates by 25bp from its current low of 25bp. Swiss monetary authorities have been loath to encourage any policy that would strengthen the franc further, however today's report clearly reveals that the export driven economy continues to perform well despite unfavorable exchange rate differentials.

Meanwhile in UK the PMI Manufacturing data came in slightly better than forecast at 57.3 versus 57.1 remaining above the 57 level for the fifth straight month, Over the weekend a Goldman Sachs report suggested that UK economy could outperform both US and EZ in the next year and if that would be the case then the new austerity model of PM David Cameron which asserts that economic growth can coexist with fiscal tightening will be vindicated. Although growth in UK has undoubtedly been impressive we remain skeptical the pace can bu sustained. Fiscal cuts have yet to hit the economy, and when they do in the fall the impact on aggregate demand could be much more severe than the market believes. In the meantime sterling was able to take out the 1.5800 level and if US data proves supportive the unit could see 1.6000 by the end of the week as it continues to attract speculative flows.

Although the risk trade has proven to be surprisingly resilient over the past week, as all major currencies have been able to remain above their key resistance levels, this week could prove to be much more problematic for high beta FX if US economic data misses its mark spreading doubt about the sustainability of global growth. Today's ISM Manufacturing report kicks off a very heavy data week that culminates with the NFP number on Friday. The markets are looking at a relatively steep drop in ISM to 55.2 from 57.0 the month prior. Although data from Empire and Philly releases suggests weakness, Friday's surprisingly strong Chicago PMI read has sown doubt into the bearish consensus and helped support risk flows so far. Nevertheless, as we wrote earlier, "if today's ISM Manufacturing data shows a bigger than expected decline, the current optimism will quickly evaporate as traders consider the unpleasant possibility that growth in both China and US may be slowing in sync - a dynamic that could usher in a new period of contraction in the global economy in the second half of the year."

FX Upcoming

Currency GMT EST Release Expected Prior
USD 14:00 10:00 ISM Manufacturing PMI 54.3 56.2
USD 14:00 10:00 Construction Spending m/m -0.4% -0.2%
CAD 14:00 10:00 ISM Manufacturing Prices 55.3 57.0

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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