Thoughts from our Strategy Team
PMI data and updated estimates of Eurozone QI GDP have been the main economic news of note through the morning. The UK services PMI had the largest impact on currency markets after it posted a 16-month high reading of 54.9. GBP/USD spiked up over 1.5370 and looks set to extend its gains in coming weeks. Modest UK economic recovery is extending through QII, fears of a “triple dip” recession are distant. In the Eurozone the composite PMI was unrevised from the flash estimate at 47.7 in May. The services PMI was revised slightly lower to 47.2, offsetting the upward revision to the manufacturing reading recorded earlier in the week. Second estimates of Eurozone GDP were unchanged at -0.2% QoQ, although the annual rate of contraction was revised lower to -1.1% YoY. Consumer spending actually grew in QI, by 0.1% QoQ. Investment spending was the major negative falling by another -1.6% QoQ. Exports also fell for a second successive quarter dropping by another -0.8% QoQ following a 0.9% QoQ fall in QIV. Government spending was a modest negative at -0.1% QoQ. EUR/USD has dipped a little through the morning, but is holding in familiar territory in the 1.3050-1.3100 area ahead of this morning’s key US data releases – ADP jobs and ISM non-manufacturing..
Overnight USD/JPY was volatile in Asian trade, and has dipped back below ¥100. Japanese PM Abe delivered a speech on his 'third arrow', i.e. the growth strategy for increasing Japan’s economic growth potential. An English translation was not available at the time of writing, but the key themes have been released on newswires. Abe outlined his broad framework: set up 'special strategic zones', loosen investment rules for Japan's public pension funds, and reform the agriculture, energy, health and infrastructure sectors of the economy. Abe indicated more detail on the growth strategy will be delivered next week, presumably after Cabinet agree to it.
Abe also provided some goal posts to measure success: triple public-private infrastructure investment, increase per capita incomes by 3% per year, double foreign investment by 2020. Abe hopes to pass the growth strategy laws as soon as autumn (September-November). And then the hard work of implementation begins.
Sadly, there does not appear to be mention of deregulating the labour market or making the pension system more sustainable. These reforms would have large impacts on raising growth potential and tackling high public debt. It's worth noting previous Japanese Prime Ministers have announced growth strategies before but these strategies did not work. Abe’s speech should be seen in the context of an upper house election, likely to be held on 21 July. We expect USD/JPY volatility to continue over the remainder of the week, as the market awaits further details of Abe’s structural reform proposals and US non-farm payrolls. We maintain our strategy of accumulating USD/JPY below 100.50.
The USD has recouped some of the losses following the over-reaction to the weak ISM manufacturing survey on Monday. Also supporting the USD were higher US bond yields and comments from FOMC voter Esther George supporting a tapering of asset purchases. George has dissented against the asset purchase program since 30 January 2013 citing concerns about financial imbalances and inflation expectations. Another hawk, Richard Fisher spoke as well, although as a non-voter we view his comments as less significant than George’s. The Fed releases its Beige Book later today (2pm EST/7pm BST) ahead of the FOMC meeting on 19 June. We expect no policy change by the FOMC this month but expect the Fed to taper its asset purchases in December 2013 and cease asset purchases in March 2014. We continue to expect relatively firm US yields will support the USD ahead of today’s ADP employment report (8.15am EST/1.15pm BST) and Friday’s May non-farm payrolls reports.
AUD/USD has continued to sell off. The key focus in the Asian session was QI GDP, which printed slightly on the soft side of expectations at 0.6% (QoQ). Australian growth is a touch below trend, but still very good when contrasted to the growth rates of other major economies. Nonetheless, we expect the GDP report will not be enough to outweigh our expectations of a firmer USD this week. AUD is likely to remain heavy in the remainder of the week, particularly if US yields keep rising and US non-farm payrolls is solid.
NZD/USD lifted through the Asian session to trade up to 0.8060, boosted by a much stronger than expected level of construction shown in the Q1 Building Work Put in Place Survey. However, NZD has traded lower throughout the London session. Continued earthquake rebuilding was reflected in the 23% increase in the value of total building activity in Canterbury – much higher than the robust 5.1% across the rest of NZ. The quarterly NZ Manufacturing Survey is released tonight (6.45 pm EST/11.45pm BST). We expect a 1% quarterly lift in NZ manufacturing activity, reflecting the improvement seen in manufacturing PMI surveys in recent months, as well as manufacturers’ indication of activity in the Q1 NZIER QSBO. Despite these positive developments, we think the risk is a firming USD sees the NZD continue to be heavy
Thoughts from our Trading Team
Aud/Usd: Saw mostly selling overnight from various accounts. Eur/aud buying and Aud/jpy selling the main drivers of lower aud/usd. Resistance should come in now at .9600-20 region where it broke down from and never recovered. Support at moment at .9550 then .9528 -- last week’s lows.
Nzd/usd: been in .7940-.8125 trading past 6 days. Continued 2 way flows with bias towards downside break of .7940 in the cards(double bottom May 31 and June 3rd). Will continue to play the range until breaks.
EUR: 200, 100 day Moving averages(1.3040,1.3107) still providing support and resistance and have contained the pair for the last 48 hours. I prefer to play EUR from the short side and will sell rallies to 1.3110 with a stop above 1.3180.
JPY: Abe did not impress investors and the Nikkei suffered because of it. 100.50 offers will continue to cap rallies. Look for 98.90 to be tested and bottom out near 98.00
AUD & NZD Today
AUD feeling the full effects of a fairly soft Q1 GDP that came in below expectations on the headline at 0.6% qoq & 2.5% yoy and as expected has been sold back down to near lows seen last week against the USD and against many of the crosses … this morning buying interest from Exporters and Far East accounts taking profits into the 0.9520/40 region is noted before AUD can test 0.9480 and then 0.9400/20 with the latter containing the 2011 low and the 2009/2010 high …. Expect sellers to emerge in numbers on any move into the 0.9600/40 area. NZD by comparison fairly stationary tracking between good two-way interest in the 0.7980/0.8050 area spiked to session highs by a good release for Q1 Construction data but then weighed a little by the release of May’s 1.6% decline in NZ Commodity prices which is the first decline in 10 months …. we also continue to favour selling rallies above 0.8040 or on a break of 0.7940 as Kiwi also looks headed lower towards the 0.7800/40 region.
Commonwealth Bank of Australia