For some reason, the market continues to get excited about fractions of points of surprise in Chinese activity surveys, as overnight we saw a bigger reaction in JPY crosses to the suspect official Chinese surveys than we did to quarterly Tankan surveys. The latter generally showed disappointing manufacturing readings and better than expected service-sector readings, extraordinarily ironic given that the entire Abe- and Kuroda-nomics effort has been aimed at crushing the yen in order to boost manufacturing, while it has been most successful at boosting tourism and therefore the service industry instead.
Today we have the rest of the world reporting its various manufacturing PMIs, and the US release is far more interesting now that we have seen yesterday’s extremely weak Chicago PMI print. Normally, that survey is quite closely correlated with the overall ISM manufacturing survey. Last month’s Chicago PMI was also very weak, while the ISM survey showed relative resilience. Can we have this kind of divergence for two months in a row? Today’s ISM manufacturing will tell us, though it is less important than Monday’s ISM non-manufacturing release, which is shaping up to be a strong one , if we're to believe the Markit survey.
I suspect the US dollar will only be vulnerable tactically if both today’s ADP employment change print for March is weak and the ISM manufacturing survey also proves weak. Key levels regardless of data surprises are 1.0800 in EUR/USD and 119.50 in USD/JPY, with the latter tested overnight. Then it will be up to Friday’s US employment report to set up next week’s action. Note that we have a mere 60 bps of Fed hikes priced in through June of next year, so fairly soon, to talk about dovish Fed surprises beyond marginal ones, we’re going to have to start talking about the Fed scrapping the idea of ever hiking rates. I don’t think we’re ready for that just yet…
Chart: USD/CAD
USD/CAD saw an orderly consolidation within the range on yesterday’s slightly stronger than expected Canada January GDP print. The focus remains higher here as long as we have weaker oil prices and the US data doesn’t surprise too negatively.
G-10 rundown
USD: Needs strong data through Friday to maintain rally stance. Careful of thin trading conditions.
EUR: On the weak side, but hasn’t exactly fallen apart even as Greek rate spreads remain very wide this morning. Next week is a critical one for Greece with a payment deadline approaching and a lack of solutions.
JPY: Spiked back a bit weaker overnight on BoJ rumblings as Kuroda underlines the 2% inflation target and as a LDP lawmaker who was a significant contributor to formulating the Abenomics policy was out demanding further BoJ easing on the risks of economic slowdown.
GBP: should be reactive to today’s UK PMI figure. EUR/GBP focus generally lower unless 0.7300 can’t hold. GBP/USD is a mess between 1.5000 and 1.4750
CHF: EUR/CHF 1.0425 range low is the focus for now. Move above 1.0550 needed for upside interest there.
AUD: Looking to fade rallies for tests of new lows in AUD/USD as RBA is likely set to cut next Tuesday and this is mostly, but not fully priced in.
CAD: weak on weak oil and preferring to keep focus higher in USD/CAD toward 1.2800 and beyond.
NZD: AUD/NZD trying to grind out a move to parity. I suspect we post the cycle low (if not in already) over the next week of trading.
SEK: Watching today’s reaction to Swedish PMI for relative strength in EUR/SEK. 9.25 is a support there, followed by 9.1750
NOK: Yesterday saw an attempt at a bearish reversal in EUR/NOK, but the significance of this is weakened by the fact that the pair is trading in the middle of the range and weak oil prices. Risk to 8.85 if we trade back well above 8.72.