A number of central bank monetary policy rate announcements combined with few Group of 10 jobs reports will dominate the fundamental horizon for the remainder of this week. Already the forex market has taken a curve ball with the release of a record-low HSBC services purchasing managers’ index (PMI) figure from China late last night. Aside from a few of its largest regional trading partners, the forex market again remains relatively contained. The noted overnight weakness in China’s headline number (50 versus 53.1) possibly reflects the impact of the ongoing property slowdown in many cities within the country – housing-related activity sees less business. On the plus side, China’s employment and business sentiment indices remain somewhat stable in turn providing relief for soft landing supporters.
One would have expected the AUD to wilt under such news but the main Antipodean currency rose strongly (AUD$0.9338) after the Reserve Bank of Australia (RBA) kept its own cash rate unchanged. The bank has left little room in its statement for any contemplation of further cuts. This is certainly aiding the most coveted of trades in a low rate environment — the carry trade funded by cheap EURs.
RBA Governor Glenn Stevens kept rates anchored at a 12-month low (+2.5%) despite mining investments cooling and a stubbornly strong Aussie. A percentage of the market was probably expecting more direct jawboning from Stevens, but he admitted that the outlook for the Aussie economy looks challenging. The AUD rallied despite the disappointing Chinese headline and another substantial trade deficit headline for June from Australia. The print (AUD$-1.68B versus -$2.01B) was narrower-than-expected but it still marked the economy’s third consecutive contraction. The support is in the details: exports to China (its largest trading partner) rose nearly +4%, while shipments of iron ore were up by nearly +5%, albeit from a downwardly revised volume for June. The AUD’s nemesis, like all the majors and emerging market currencies, remains rising U.S. yields.
Hawks Fly at RBI
The Reserve Bank of India’s (RBI) monetary policy statement is being perceived as more hawkish-than-expected, and is pushing any rate cut expectations further out the curve. The RBI is staying on the sidelines, keeping its benchmark-lending rate unchanged at +8%. A true economic concern is that RBI policymakers continue to see upside risks to next year’s inflation target (+8%), citing higher potential food and energy prices. Governor Raghuram Rajan seems to be preparing the RBI and the market for higher U.S. rates, which will have an immediate and negative impact on emerging market currencies, especially for those economies whose fundamentals remain weak. The fixed-income market is pricing in a RBI rate cut in the first quarter of 2015, when policymakers should have a better handle on the inflation horizon.
Will the Old Lady Hike Her Rates?
In the U.K, the July service PMI managed to print its highest level for the year earlier this morning. It’s a tad surprising given the weakness seen in June. The sentiment reading (59.1 versus 57.7) is not as high as the fourth quarter, 2013, but it certainly is a healthy swipe that managed to boost the pound outright (£1.6871) and on the cross (€0.7939). Digging deeper, what should be supporting a Bank of England (BoE) tightening cycle later this year is the indication of “capacity pressures” as the backlog of work rose at a “marked and accelerated pace,” and that a key driver for operating costs were higher wages for companies. Certainly both of these are a test on spare capacity in the U.K. labor market. It should be a welcome boost for hawks advocating a November rate hike. The BoE Monetary Policy Committee’s two-day meeting gets underway tomorrow, and reports like this increase the scope for dissent.
The EUR Heads Lower
The EUR is back under pressure across the board, testing the lower boundary of support outright (€1.3388), and floundering just ahead of last week’s nine-month low of €1.3366. Obviously, GBP has managed to the push the single lower ahead of stateside opening, retracing most of last Friday’s strength, as support at €0.7927 come into focus. The final readings of July services PMIs in Europe came in as expected (54.2 versus 54.4), with only Italy failing to show an improvement from June (52.8 versus 53.9). The composite was at 53.8 versus flash 54; nevertheless, both happened to beat the June prints. The data would indicate that the eurozone economy is growing at a quarterly rate of +0.4%. Analysts are suggesting that firms are cutting prices at a sharper rate, pushing the possibility of higher deflation risks.
The European Central Bank is expected to remain on hold with rates and other policy action at its August 7 meeting. President Mario Draghi is likely to emphasize the long-term refinancing operation that will start in September, and the completion of the bank’s asset-quality review in October. In respect to inflation, he is likely to downplay the eurozone’s recent drop to +0.4% in July from +0.5% in June, while highlighting lower energy prices and higher core inflation. For the time being, the EUR bear remains in control.