Market Drivers June 05, 2017
Europe and Asia
AUD: Gross Operating Profits 6.0% vs. 4.5%
EUR: PMI Composite 56.8 vs. 56.8
GBP: UK PMI Services 53.8 vs. 55
North America
USD: Factory Orders 10:00
USD: ISM Non-Manufacturing 10:00
The biggest news in the FX market did not come from Asia or Europe today, but rather from the Middle East where a diplomatic row between Qatar and Gulf states boiled over into in a full blown conflict with Saudi Arabia, Egypt and UAE severing diplomatic ties with Qatar on claims that the Kingdom has been a major sponsor of terrorist activities in the Middle East.
The tensions between Gulf States and Qatar has been brewing for a while. Qatar is seen as a close ally of Iran and has moved away from being a broker in the region's many conflicts. The news puts the Trump administration in a delicate situation as it maintains an army base in Qatar but at the same time has clearly shifted its foreign policy towards Saudis and increased its opposition on Iran.
From an economic point of view, Qatar is not a big producer of oil but is a major supplier of LNG. As such the markets quickly surmised that any disruption or blockade of Qatar's primary export could benefit Australia which is becoming a major LNG player in its own right. Australia has more than $180 billion of liquefied natural gas export projects coming online, with developers planning to add about 53 million tonnes per annum (mtpa) of LNG production by 2017, an increase that would make the country the world's top LNG exporter.
AUD/USD rose steadily throughout the night climbing from .7425 to .7480 and could make a run at the .7500 level as the day proceeds. With US yields mired at their lowest level in months, the Aussie could also get support from carry trade flows especially if RBA reaffirms its neutral stance in tomorrow's RBA meeting.
Elsewhere, cable was relatively steady despite the horrible terror attack over the weekend and less than forecast PMI Services number. The PMI Services printed at 53.8 versus 55 eyed. This was the lowest reading since February. According to Markit:
"May data highlighted a renewed slowdown in business activity growth across the UK service economy, following the four-month peak achieved in April. This partly reflected a softer pace of new order growth, which survey respondents linked to squeezed household budgets and, in some cases, delayed decision making among clients ahead of the General Election."
Despite the weaker eco data, cable rebounded on the latest poll from ICM that showed Conservatives with an 11 point lead. The event of this weekend forced all campaigning to stop until Monday and it's difficult to say just what type of impact the London Bridge terror murders would have on the UK Election. It does appear to have stymied Labor's momentum and the consensus view is that Conservatives will maintain their majority, although any projections of a blowout win seem unlikely. In any case GBP/USD found solace in the latest polling news and the pair moved through the 1.2900 figure in mid-morning London dealing.
In North America today the eco focus will be on the ISM Non-Manufacturing report with markets looking for 57 versus 57.5 the month prior. The news is likely to be anticlimactic coming as it does on the back of weaker than expected NFP results last Friday. Any miss to the downside, however, could pressure USD/JPY further. The pair has been consolidating at the 110.50 level all night, but any additional confirmation of a slowdown in US demand could embolden shorts to press for the 110.00 level as the day proceeds.