Optimism from Australia's central bank drove Chinese shares sharply higher overnight, with investors looking to the Aussie statement as a proxy for bullishness on the mainland economy.
Article / 03 July 2014 at 6:54 GMT

FX Update: USD trying to show resilience ahead of ECB and NFP

Head of FX Strategy / Saxo Bank
  • Weak retail sales also pulled AUD down
  • Yellen says monetary policy not the main lever
  • Riksbank expected to trim rates 25bps
AUD walloped
The Reserve Banks of Australia governor Glenn Stevens was out overnight protesting that the market was underestimating the likelihood of a significant fall in the AUD, saying “most measurements would say it is overvalued, and not just by a few cents”. This caught the market on the wrong foot as this Tuesday’s RBA meeting produced a statement that looked rather passive, waving a white flag in the face of further AUD strength. The sharpness of the fall, all the way back below 0.9400 in AUDUSD as of this morning, was aggravated by the fresh positions put on this week on the technical break higher and by the very weak Australian retail sales report for May that was released overnight. This reversal has created a compelling bearish reversal pattern, though one that will likely require a dose of isolated USD strength to have more durable significance. Cue today’s US economic data... 

A compelling reversal pattern as the break higher in AUDUSD was roundly rejected, with eyes now shifting to the support at 0.9200 that defines the bottom of the range since.
US Federal Reserve Bank chair Janet Yellen was out speaking yesterday, spelling out very clearly that she doesn’t believe that monetary policy is the right tool to fight financial stability risks (that’s a bit odd, considering that it is clearly monetary policy that has created the major bubbles). See New York Times coverage. Instead, she favours a regulatory or supervisory approach. That’s pretty rich, when it is the Fed’s gross mispricing of money that puts markets in the financial danger zones for bubbles in the first place. Regardless, this merely underlines that the Fed will not see a bubble until it has exploded in their face, and that only stronger economic data is going to lead to tighter monetary policy.

Looking ahead
The European Central Bank is up just four weeks after last month’s meeting produced weakening only in the anticipation phase and virtually nothing in the reaction phase. It will be up to president Mario Draghi to continue to provide the pressure with both rhetoric (will he note the downside risks as some of the EU activity surveys are softening and the major outlook surveys in Germany are materially worse?) on his intentions and more details on the asset backed securities purchases program that is in the pipeline. There may be fewer details for now than the market wants as the ECB announced so much the last time around, so the focus may be more on Draghi’s tone and the hints at the ECB’s internal debate on what may be necessary if conditions don’t improve more markedly.

SEK traders will have their eyes out for today’s Riksbank meeting, where the bank is expected to trim rates 25 basis points to 0.50 percent. The market hasn’t been kind to central banks that are in an easing stance, and SEK is no exception, as GBPSEK has been a popular trade of late. With EURSEK breaking to new highs recently, a good deal is priced in and we’ll need to see dovish guidance to keep SEK on the back foot.

Today’s US data comes at an important crossroads in a number of the major USD pairs and will likely set the direction for the greenback until the next data cycle – or at least until the Yellen Humphrey Hawkins testimony before congress later this month (Is this the 17th? This is not showing up on my usual calendar provider).

The ISM non-manufacturing survey has picked up the pace over the last few months and an anecdotal Bloomberg article on the US population driving more leads me to believe we could lean toward another strong reading. To support that with a bit of data, a 52-week moving average of US implied gasoline demand shows the strongest demand since mid-2011 and rising.

The US payrolls are expected in at the usual +200 area, but isn’t it time for a decent surprise in this number? I would very much like to see what a +300k would do for the USD, though this is unlikely. On the unemployment rate side, we have yet to see an increase in the participation rate that would signal more discouraged workers returning to the workforce (and thus risking, ironically, a higher unemployment rate unless payrolls gains are particularly strong).

The USD should be very sensitive to the data today, as the Fed has surrendered its forward guidance for the most part to the strength of the incoming data.

The USD bulls (anyone still there?) can take some heart from EURUSD retracing back below the key resistance area it took out earlier this week. As well, USDJPY is attempting to avoid the abyss once again and the AUDUSD reversal noted above – now we need for GBPUSD to find a hard ceiling and we could be talking about a broad USD recovery. For that to happen, we’re going to need strong enough data to encourage the idea that the Yellen Fed is behind the curve and will be dragged into signalling more tightening.

Economic Data Highlights
  • Australia Jun. AiG Performance of Services Index out at 47.6 vs. 49.9 in May 
  • China Jun. Non-manufacturing PMI out at 55.0 vs. 55.5 in May 
  • Australia May Retail Sales out at -0.5% MoM vs. 0.0% expected  
  • Australia May Building Approvals out at +9.9% MoM and +14.3% YoY vs. +3.2%/+8.0% expected, respectively and vs. +0.7% YoY in Apr. 
  • Japan Jun. Markit Services PMI out at 49.0 vs. 49.3 in May 
  • China Jun. HSBC China Services PMI out at 53.1 vs. 50.7 in May 
  • Sweden Jun. Services PMI out at 54.6 vs. 58.5 in May 
Upcoming Economic Calendar Highlights (all times GMT)
  • Spain Jun. Markit Services PMI (0715) 
  • Sweden Riksbank rate decision (0730) 
  • Italy Jun. Markit/ADACI Services PMI (0745) 
  • France Jun. Final Markit Services PMI (0750) 
  • Germany Jun. Final Markit/BME Services PMI (0755) 
  • Euro Zone Jun. Final Markit Services PMI (0800) 
  • UK Jun. Markit/CIPS Services PMI (0830) 
  • Sweden Riksbank press conference (0900) 
  • Euro Zone May Retail Sales (0900) 
  • Euro Zone ECB rate announceent (1145) 
  • Euro Zone ECB Draghi press conference (1230) 
  • Canada May International Merchandise Trade (1230) 
  • US May Trade Balance (1230) 
  • US Jun. Change in Nonfarm Payrolls (1230) 
  • US Jun. Unemployment Rate (1230) 
  • US Jun. Average Weekly Hours and Average Hourly Earnings (1230) 
  • US Weekly Initial Jobless Claims (1230) 
  • US Jun. Final Markit Services PMI (1345) 
  • US Jun. ISM non-manufacturing survey (1400) 
  • Euro Zone ECB’s Draghi, Weidmann to speak (1715) 

- Edited by Adam Courtenay


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