Sterling has been blasted lower after BoE governor Carney cast doubt on a previously pretty-much-expected UK May rate hike. The EU's rejection of Britain's latest Brexit-Irish border plan only served to deepen the rot.
Article / 05 February 2013 at 9:49 GMT

Weak US ISM Non-manufacturing survey dead ahead?

Head of FX Strategy / Saxo Bank

Weakening consumer confidence could weaken the most important of the major US economic surveys, but the market reaction to US data has been muddled of late. Also, RBA fails to cut, but dovish language weighs.

Australia – RBA fails to cut, but outlook dovish
Australia’s RBA passed on easing rates this time around, which a sizable minority was looking for, but it did downgrade the rate outlook slightly, which saw the front end of the curve hardly budge (STIRs popped a bit higher, however). The RBA said that inflation is less of a threat due to weaker labor market conditions and this “affords scope to ease policy further, should that be necessary to support demand”. AUD has been buffeted about by the wildly volatile EUR and JPY and it will be hard to express a view in the currency until those two currencies cease being the highest beta plays in this market, but I am watching the 1.0310/1.0350 area in AUDUSD with interest, as the chart looks vulnerable if the pair can work down through this zone, as discussed yesterday.

Services surveys
China’s HSBC services survey showed a strong surge for January, but I refuse to get sucked into the China recovery story, which will fade within a few months, I expect. If you missed it this weekend, please see Evans-Pritchard's latest on China’s demographics and the nature of its “recovery”: In Europe, some surveys have been a bit better than expected, notably Spain’s, but Italy’s latest data print pushed to a new multi-month low, so the improvement is uneven.

The UK’s Jan. Services PMI was above 50, which has everyone falling all over themselves to cover their GBPUSD shorts ahead of the BoE on Thursday, which is more likely to pass on further asset purchases (the thinking goes) after this number. I still look for resistance somewhere between here and 1.5900 if 1.5800 can’t hold the pair.

Carney testimony/BoE preview
Don’t miss Bloomberg’s coverage of the arrival of Carney on the scene later this year, and more relevant for this week, his arrival before parliament on Thursday, when he will address UK lawmakers. This comes on the same day that the BoE will make a decision on whether to expand its asset purchases already this week or will wait until farther down the road to do so. The forcefulness of Carney’s remarks on the matter of Nominal GDP Level Targeting (get used to that NGDPLT acronym, folks!) could well have an important bearing on the pound, which has little to recommend it, outside of occasional arguments that positioning is overextended or if the EU systemic risks spin out of control again. Indeed, Carney’s “escape velocity” is going to see investors seeking escape from the pound. I am fast revising my GBPUSD forecast for 12 months ahead lower – from 1.50 not long ago to more like 1.45 and I may move it again. Stay tuned.

Looking ahead
EURUSD is recovering ahead of the ECB on Thursday, but note the chunky expansion in peripheral spreads again in the chart below. It’s hard to imagine things spiralling out of control in the nearest term with the knowledge that a country can tap the OMT in the even it needs to, but protests in Spain amid an ugly political scandal suggest the situation is far from stable. In Italy, Berlusconi has been gaining in the polls. Depending on what the ECB has to say on Thursday, I think we are fast nearing a pivot point for this Euro move higher.

Chart: EURUSD vs. German less avg. Italy/Spain 10-year yields
Much has been made about recent LTRO repayments driving a shrinking of the ECB’s balance sheet while the Fed’s balance sheet is expanding rapidly again and the BoJ’s is predicted to virtually explode, but let us not forget the fragile framework of the EU and the risks of social tensions, not to mention that bond market spreads remain significant and have widened noticeably recently, with the EURUSD not taking note. This divergence is unlikely to continue much longer if at all – either the spreads come in or we see another correction wave lower in EURUSD.


Up later today, we have the US ISM non-manufacturing survey, which is really the important one as services dominate the US economy. The recent plunge in confidence levels and record high petrol prices for this time of the year suggests that the survey could prove weaker than expected. One can build a case that the survey is on an improving trend – I expect mean reversion – if not this month, then next – particularly as consumer confidence surveys have really come off and this survey is often tightly correlated with confidence. The question is how the market reacts – my suspicion is that an ugly services survey would be considered a risk negative and if that supports the bond markets, it will generally support the USD and the JPY. If it proves stronger than expected, we might see USDJPY rushing to yet another climactic high – which it is already trying to do ahead of the data release.

Stay careful out there – volatility in this market is likely to stay high. I’m surprised to see this wild JPY move back toward the recent lows so quickly after a decent correction started yesterday. The way it has moved suggests that we end in some kind of climax reversal scenario of stunning magnitude - please be careful out there.

Economic Data Highlights

  • New Zealand Q4 Average Hourly Earnings fell -0.4% QoQ vs. +0.4% expected and +1.4% in Q3
  • Australia Jan. AiG Performance of Services Index out at 45.3 vs. 43.2 in Dec.
  • Uk Jan. BRC Sales Like for Like out at +1.9% YoY vs. +0.3% in Dec.
  • Australia Dec. Trade Balance out at -427M vs. -800M expected and -2788M in Nov.
  • Australia Q4 House Price Index out at +1.6% QoQ and +2.1% YoY vs. +0.3%/+2.1% expected, respectively and vs. -0.1% YoY in Q3
  • China Jan. HSBC Services PMI out at 54.0 vs. 51.7 in Dec.
  • Australia RBA Cash Target maintained at 3.00% as majority expected
  • Switzerland Dec. Trade Balance out at +1.0B vs. +2.0B expected and +2.91B in Nov.
  • Sweden Jan. PMI Services out at 52.4 vs. 51.2 expected and 49.1 in Dec.
  • Spain Jan. Services PMI out at 47.0 vs. 44.2 expected and 44.3 in Dec.

Upcoming Economic Calendar Highlights (all times GMT)

  • UK Jan. PMI Services (0930)
  • Euro Zone Dec. Retail Sales (1000)
  • Switzerland SNB’s Zurbruegg to Speak (1230)
  • US Fed’s Duke to Speak (1330)
  • US Jan. ISM Non-manufacturing Survey (1500)
  • UK BoE’s Haldane to Speak (1530)
  • US Weekly API Crude Oil and Product Inventories (2130)
  • UK Jan. BRC Shop Price Index (0001)
  • Australia Dec. Retail Sales (0030)
  • Japan BoJ’s Sato to Speak (0130)



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