Morning Fundamentals: Australian PMI Rises To 43.8 points

Australia's manufacturing sector extended declines for the 23rd consecutive month in May but the pace of contraction slowed. The Australian Industry Group (Ai Group) performance of manufacturing index (PMI) rose 7.1 index points in May to 43.8 points. A reading above 50 on the index indicates expansion, while a reading below indicates contraction. Australia retail sales came in at 0.2%, slightly lower than the 0.3% expected but an improvement from previous month’s contraction. Historically it has ranged between -0.8% and 1.3% for the past 24 months. However, HSBC China Manufacturing PMI (Final) came in lower than the initial Flash estimate, coming in at 49.2 vs. 49.6. This is the first time the PMI numbers moved below 50.0 par level since Dec 2012, putting in doubt the official Chinese figures released last Saturday which indicated a relatively strong 50.8. A measure of U.S. manufacturing fell in May to its lowest level since June 2009 as slumping overseas economies and weak business spending reduced new orders and production. Japanese Capital Spending improved from -8.7% to -3.9%. This beat the estimate of -5.5%.

After a huge bear session lasting the month of May, the AUD dropped some 7 cents but is holding at the precipitous level of 0.9600. It has managed to shake off some weak Australian data, notably Retail Sales, which came in slightly below the estimate. All eyes are on the RBA meeting tomorrow with most analysts predicting no change to the current rate of 2.75%. Historically the RBA has been too late to cut interest rates and too early to raise them. In the US, today’s highlight is ISM Manufacturing PMI. Will we see the US bounce back from last week’s mixed data? ANZ Job Advertisements posted another decline, as the employment indicator dropped 2.4%. The indica-tor has recorded only one gain this year, underscoring weakness in the Australian employment sector.

There was good news from Company Operating Profits, which rose 3.0%, well above the estimate of 1.6%. There is still growing speculation that the Federal Reserve could scale back quantitative easing in the next few months. Fed Chair Bernanke, continues to hint that QE could be wound up in the next few months. However the US continues to print mixed economic data, so the Fed is unlikely to act before it is convinced that the US economy is improving. The general consensus is they need to see NFP at 200k a month for about 6 months before it is wound back. Much of the volatility we are seeing from the US dollar against the major currencies can be attributed to market uncertainty about what action the Fed will take, and further hints about scaling back QE will continue to impact on the currency markets.

U.S. stocks rose, with the Standard & Poor’s 500 Index erasing earlier losses, after Federal Reserve Bank of Atlanta President Dennis Lockhart said central bank officials are committed to record stimulus measures. The S&P 500 rose 0.6 % to 1,640.42 at 4 p.m. in New York. The Dow added 138.46 points, or 0.9 %, to 15,254.03. Almost 7.7 billion shares traded hands on U.S. exchanges today, 23 %higher than the three-month average. European stocks declined for a second day, extending a one-month low. The STOXX Europe 600 Index dropped 0.8 %to 298.59 at the close of trading, the lowest level since May 2.

EUR/USD The Euro pushed higher against the USD overnight again being a beneficiary of U.S. Dollar weakness. With manufacturing numbers coming in at a 4 year low the Euro climbed as high as 1.3080. The threat of negative interest rates in Europe has been in the backdrop of in-vestors minds. We are still within the 400 point range between 1.28 and 1.32 are awaiting a clear breakout. Once we see this pair breakout of this range we will have more direction on this pair. The U.S. dollar continues to be extremely weak however any breakout of this range will need to see either inherent euro strength or weakness. We open this morning at 1.3060 with a range between 1.29 and 1.31 for the up-coming Asian session.

Compass Direction
Short-Term Medium-Term
NEUTRAL BEARISH


AUD/USD The Australian dollar rallied overnight on inherent U.S Dollar weak-ness across the board. With the slump in equities continuing pressure is mounting for some positive data particularly out of the U.S. to turn favour back towards the U.S. Dollar. The manufacturing numbers out of the U.S. came in at a 4 months low causing the U.S. Dollar to weaken. All eyes will be on the Reserve Bank of Aus-tralia today awaiting the interest rate an-nouncement. Only one out of 25 econo-mists surveyed by Bloomberg believe there will be another 25 basis point cut. The Aussie opens this morning at 97.60 up from the previous session low of 95.46. The expected range for today is between 96.50 and 98.25.

Compass Direction
Short-Term Medium-Term
NEUTRAL BEARISH