This market is expected to ease into a cautious gear, especially after some of yesterday’s sharp gains, and more specifically, ahead of some key events later this week. Economic fundamentals are unlikely to play a pivotal role ahead of the ECB and BoE rate announcement on Thursday and Friday’s granddaddy of economic indicators, Non-Farm Payrolls. This week, this month, even this quarter is all about the US employment situation for June. The big question is whether employment is gaining enough momentum for the Fed to start thinking about slowing quantitative easing. It’s believed by many that a healthy consistent gain of over +200k is needed for this to happen. How else are you going to get an unemployment rate to print sub +7% by next year?
Has the Fed won “half” the battle? Risk assets reacting positively to strong US manufacturing data on Monday (PMI 50.9) is rather telling. Investor’s fears of reduced Fed bond buying or tapering and an eventual interest rate hike seems to be waning. Perhaps the market is now trading on the fact that “good news is actually good news”? Last month, a strong release like a solid US ISM print would have been the signal for the market to sell off aggressively. The “proof is in the pudding” and that will come with this Friday’s US jobs report. If it’s a strong number, and this market continues its rally, then ‘helicopter’ Ben and his fellow cohorts, have gone a long way in reassuring investors that QE will only be reduced once the US economy continues to improve.
As noted, economic releases are thin on the ground today with the most influential being the Euro-zones PPI and UK construction PMI. Stateside has little else to offer apart from US factory orders and vehicle sales. On a minor yet relieving note, was the number of registered job seekers in Spain falling this month (-127k) for the fourth consecutive time – Is this suggesting that the recession may be over for Europe’s fourth largest economy?
Prices charged by Euro-zone manufactures fell for the third consecutive month in May (-0.3%), again suggests that Draghi and the ECB will be facing limited upward pressure on consumer price inflation over the summer months. Last month Euro CPI rose again and is now closer to the ECB’s target rate. The Central bank meets Thursday and rising inflation, despite still being below target, is likely to be an obstacle for Euro policy makers to add further stimulus to an ever-weakening Euro economy. For PPI, the pressure came from energy prices falling -0.8% month-to-month or -1.8% year-over-year.
New BoE Governor Mark Carney’s second day on the job and he should be satisfied with what he fundamentally sees ahead of his first BoE meet this week. Activity in the UK’s construction sector expanded for a second consecutive month in June (51), aided by Prime Minister Cameron’s housing market initiatives – the “help-to-buy” program. This is surely another data point that can be added to the list of upbeat indicators that would suggest a healthy Q2 for the UK? More importantly, the new orders in house building is creating new jobs, the first time in four-months.
Most of last nights market noise came from ‘down-under’. Not unexpected was the RBA keeping its policy rate unchanged at +2.75%. Analyst’s note that the key final paragraph of the statement was unchanged from the last meet – the “RBA maintains a bias to ease.” A change from the June statement is that language about the RBA’s desire for AUD depreciation became more explicit – hence, the market’s lack of interest to wanting to own the AUD. The Aussie’s new Prime Minister, Kevin Rudd, highlighting the end of a China-led mining boom could lead to a recession certainly does not support a strong currency. China is Australia’s largest trading partner and data releases like last weekend’s Chinese PMI in line at a lower level (50.1) can only be of concern to the antipodean nation as well as globally.
This market will try to remain out of harms way until they are given clearer direction. Euro money markets do not expect the ECB to be cutting rates again this week. A surprise rate cut is possible, however, improved PMI data and inflation ticking up may suggest otherwise. The market majority expects a post meeting accommodative statement. All investors require is that Draghi speaks more “clearly”. At the moment, there is much noise and no direction. The EUR has settled into a small range after holding last week’s lows at 1.2991/85. Immediate resistance appears at 1.3100, and a market cap here would keep the immediate risks lower. Through last week’s lows, speculators are expected to target the trend line backing at option-supported areas (1.2940-50). Below this area it opens up a test of the bottom end of the range sub-1.2900.
For the Yen, the dollar has crept closer to the psychological ¥100 mark (last crossed in early May), and has lead to another fresh round of buying of Japanese equities. The markets inability to break through this 61.8% retracement of the May- June fall will have short-term momentum swinging towards a dip back from it, towards ¥98.80-00. However, the immediate risks higher through ¥100.46 could allow this market consider retesting this year’s high at ¥103.74.
Euro Moves Up as Eurozone PMIs Point Higher
Dean Popplewell, Director of Currency Analysis and Research @ OANDA MarketPulseFX