- Holiday week encourages thin markets
- Friday’s NFP to dominate this week’s activity
- Market looking for further stimulus from China
- Euro manufacturing PMIs showing signs of inflation
Holiday thinned markets (Japan’s Golden week holiday Monday through Wednesday, and the U.K.’s May Day celebrations) are keeping FX action relatively tight ahead of the open stateside this morning. Nevertheless, this is a big week for capital markets with event risk coming from various directions that is sure to have a major impact on FX moves.
U.S. nonfarm payrolls (NFP) is expected to dominate the week, especially after last month’s disappointing release that has pressured the dollar ever since. The market is looking for a rebound to +215,000 jobs and an unemployment print to dip to +5.4% from +5.5%. Before NFP, U.S. March durable goods/factory orders data is due this morning, and trade data tomorrow is expected to shape final first-quarter gross domestic product forecasts. With the Federal Reserve looking beyond the first quarter, April’s Institute for Supply Management’s services purchasing managers’ index (PMI) on Tuesday will be key (a reading of 56.5 is expected). On Wednesday, U.S. labor costs that will be scrutinized, especially after last week’s employment cost index pickup.
RBA Rate Cut Speculation Reaches Fever Pitch
The Reserve Bank of Australia (RBA) meets tomorrow and the market is pricing in a +72% chance of a -25 basis point cut to +2%. Last week’s AUD move above A$0.80 would have alarmed the RBA. If the RBA cuts, watch if the statement leaves the door ajar for further cuts. If it does, the AUD should make tracks back down toward A$0.75, its old stomping ground. Any hesitation by the RBA, and Aussie bears will come under considerable pressure, especially after last week’s selling interest that has established ‘hot’ money short positions north of A$0.80. The upcoming decision is providing a headwind for the AUD currency with AUD/USD at 0.7830 just ahead of the New York open.
U.K. Hung Parliament Not Priced In
Investors are not very fond of uncertainty and there seems to be plenty of it heading into the May 7 U.K. elections where a hung parliament is likely. Sterling (£1.5130) is expected to be vulnerable and volatile over the coming days, more so than what we have witnessed up to this point. According to the latest Commitments of Traders report, the market is short the pound, but perhaps not all that short given the uncertainty of Thursday’s result. Markets have been longer of sterling than they are now about +75% of the time. This would suggest that there is room for the market to go shorter still.
GBP/USD saw recent gains evaporate ahead of the election, with voter polling intentions suggesting a coalition government is likely. GBP/USD is currently straddling £1.5120 ahead of the European session handover after approaching the £1.55 handle late last week. The election uncertainty still does not seem to be significantly priced by the FX markets with the USD correction of last week making it difficult to justify cable shorts with any degree of confidence.
Major European Manufacturing PMIs Are Mixed
There were mixed results on the European PMI front this morning, which is never too much of a surprise to the market. The overall eurozone final manufacturing PMI has come in slightly better than the flash estimate of 51.9. The 52 final reading for April reveals some good gains on new export orders as well as manufacturing employment but the key focus will be on prices. Input prices rose for the second consecutive month and were up in all eurozone countries except Austria. The European Central Bank (ECB) needs to feel confident that the deflation trend is turned, and although it’s not a trend, this morning’s release is positive. The ECB will not get an accurate picture until much later in the year and that will involve a lot of uncertainty between now and then.
The EUR (€1.1129) has moved into the lower end of recent range in thin trading with U.K. dealers out for a bank holiday. The range €1.1070 to €1.1300 area continues to hold.
Chinese Manufacturing on the Ropes
China’s April final HSBC manufacturing PMI data missed expectations overnight to register its worst reading in a year (48.9 versus 49.4 expected). The miss is leading to more speculation of pending rate cuts from the People’s Bank of China. It’s the lowest level since last April, as demand faltered and deflationary pressures persisted. This confirms that China’s manufacturing sector is having a weak start to the second quarter. The market is now pricing in further stimulus measures to prevent the world’s second-largest economy from not slowing too much further from the +7% growth rate seen in the first quarter. Data like this is having a direct impact on Australasian currencies, especially the AUD, which is often used as a proxy for China risk.
Greece’s Liquidity Constraints
This is a big week for Greece when it comes to liquidity. Concerns of a deteriorating liquidity situation is forcing the government to cave into some, but not all, of the demands from its creditors.
Greece has a payment due to the International Monetary Fund (€200 million) on May 6, as well as on May 12 (€750 million). On Wednesday, the government will hope to conduct a €6 million T-bill auction to rollover a +€1.4 billion six-month T-bill maturing on May 8. On that day, the ECB will hold its non-policy meeting where haircuts for the emergency liquidity assistance program’s collateral is expected to be discussed.
A deal is not necessary for the ECB to release payments. The market believes that the cap on the T-bill issuance could be lifted if a Greek deal is on the horizon with its creditors.