With the US back from its Labor Day holiday it is perhaps fitting that it’s USD that is the best performing currency so far today. It has smashed higher versus the Japanese yen overnight and is stronger against all of its G10 counterparts so far. Prospects for a strong jobs report this Friday are being used as a convenient catch-all excuse for the USD movement but a 2bps increase in the 10yr treasury and, more importantly, generalised weakness elsewhere has helped more. The dollar has no real choice in looking strong when everything around it is starting to look weaker and weaker.
Japanese yen is off 0.6% this morning ahead of a cabinet reshuffle due tonight. The major changes that have yen traders worried is the prospect that Shinzo Abe, the Japanese PM, appoints Yasuhisa Shiozaki into the cabinet. Shiozaki is a major cheerleader for reform of the Japanese Government’s Pension Investment Fund. This pension fund owns foreign assets that are worth more than the Mexican economy and the market is looking for a shift in its investment objectives away from domestic debt, and by association the yen, instead opting for holdings in equities. USDJPY is running close to its year-to-date highs and we expect that JPY will continue weakening as the economy weakens into Q4.
Surprisingly, and providing a fillip for Abenomics supporters, wages rose in July by the most since 1997. Wages rose by 2.6% in the year to July but fell once inflation was taken into account by 1.4% over the same period. Consumer spending doesn’t increase after one jolt higher in wages however and we will have to see whether consumer confidence picks up in line with pay packets into the end of the year.
AUD is also lower following the first of six G10 central bank meetings this week. The Reserve Bank of Australia once again kept rates on hold at 2.5% and Governor Glenn Stevens’s comments on the currency echoed previous sentiments that exchange rates “remains above most estimates of its fundamental value, particularly given the declines in key commodity prices,” and that “it is offering less assistance than would normally be expected in achieving balanced growth in the economy.”
I can see the RBA keeping rates on hold into Q2 of next year as it continues to factor in the slack within the country’s labor markets and fears of a slowing Chinese economy – something that was shown to be occurring by yesterday’s PMI releases.
News from Europe and the UK manufacturing PMIs were broadly similar in so much that they were disappointing. In the UK, while growth has remained positive, manufacturing is now expanding at the slowest rate since June of last year. Output and new orders for UK manufactured goods continued positively but the slowing of growth has meant that employment change is at the weakest in 14 months.
All of this points to a rather broad slowdown in British industry, an entirely warranted hangover from the giddy highs that the sector hit in the early part of the year. Confidence in export markets has slipped in the past month as well, as talk of trade sanctions and a general slowing of global economic momentum have taken their toll. While the worst days of the recession are definitely behind us, this survey also suggests that the finest days of the recovery are too. Gains are going to be a lot more hard-fought. UK construction PMI is due at 09.30.
In Europe, contractions in French and Italian manufacturing and a slower than expected level of growth in Germany dragged the overall average to 50.7, the lowest since July of last year. Further pressure on the single currency will come from today’s producer price data that should show further falls in monthly and yearly factory gate prices. PPI is due at 10.00.
With the US back in the office today, we will receive the US manufacturing ISM at 15.00; expectations are for a reading around 57.0.
A slip in Swiss growth into stagnancy in Q2 has got CHF watchers frothing at the possibility that the Swiss National Bank will use this as an excuse for an additional loosening of monetary policy. The Swiss economy naturally relies on the Eurozone for the vast majority of its exports and its weakness dragged GDP to 0% between April and June against an expectation of 0.5% growth. EURCHF remains within 75 pips of the Swiss National Bank’s 1.20 floor which will come under pressure by any further ECB plan to weaken the single currency – something that Mario Draghi’s latest comments suggest he is all too happy to have occur. Whether this will come via another shift in the floor – to 1.2250 or 1.2500 for example – or by following the ECB into negative deposit rate territory remains to be seen.
