The EUR/USD is backing up on the strength of the USD/JPY sell-off, and after a round of better than expected European PMI’s. This week’s U.S. data and ECB meeting could be decisive for the next few weeks of action.
As the USD/JPY teases the 100.00 level (100.10 is the low as I write), the EUR/USD is again trying to get comfortable back above 1.3000. I suspect a good portion of the EUR/USD upside is from the USD/JPY flows, which stayed heavy overnight after the ugly late action in U.S. equity markets on Friday that established the mood for the Monday opening in Asia. The Nikkei ended the day poorly once again, and has tumbled more than 15% from its highs from less than two weeks ago. The HSBC China manufacturing survey’s new low below 50 for the May reading got more attention than the more positive official PMI survey.
World PMI day
As mentioned above, the Chinese PMI data was strong on the official surveys, and weaker on the HSBC survey (considered more focused on the smaller enterprises). European PMI’s were mostly better than expected, but we have to remember that these are comparative to recent conditions, so below 50 still means things are worse - but a little less than the previous month. Meanwhile, PMIs for the U.K., Norway, Sweden and Switzerland were all above 50. The stronger than expected U.K. PMI is particularly giving USD bulls some interesting re-entry levels for shorts. Today’s U.S. ISM Manufacturing completes the world manufacturing survey picture. A reading of 50.7 is expected – the same as last month, although the market is perhaps looking a tad higher than that after a very strong Chicago PMI reading on Friday.
The RBA on tap tonight
The RBA is meeting tonight, and the market will focus mainly on rhetoric discussing the currency’s recent very marked weakness, and how this might impinge on monetary policy. It’s likely the monetary policymakers will not see any need to rush into another rate cut now, nor is one predicted. They are also likely to view the weakness in currency as somewhat welcome for the Australian economy while not weak enough to present any risk on the inflation front. All in all, the most we can expect is an excuse to squeeze AUD shorts a bit before the currency continues its sell-off.
Chart: AUD/USD
The momentum has been coming out of the AUD/USD sell-off, but then again the lack of a bounce is interesting as the buyers are hard to find. Looks like 0.9675 is the near term resistance, and 0.9400 is the next major target area.
AUD/USD" title="AUD/USD" width="455" height="320">
Looking ahead
This week will be a critical one for both the USD/JPY and for EURUSD. The US data and equity markets – particularly in Japan - will determine whether the USD/JPY correction lower will continue. The scenario that would more likely drive a further correction lower in the pair is weak U.S. data and a rally in bonds and sell-off in equities. The opposite (strong U.S. data and bonds selling off as the equity rally gets back on track) and USD/JPY is more likely to find support even if it teases below 100.00 first.
For the Euro, the focus will be on the ECB and what it signals on new easing measures. It is probably too early for the ECB to have come up with a concrete plan that is ready for implementation. The transition away from the implementation of austerity is complete, and the pressure to do something is fast rising as the eurozone unemployment rate reached another dire record at 12.2% in April. Falling inflation levels and a very strong currency are further raising the likelihood of ECB action.
Economic Data Highlights
- China May Manufacturing PMI out at 50.8 vs. 50.0 expected and 50.6 in Apr.
- Australia May AiG Performance of Manufacturing Index out at 43.8 vs. 36.7 in Apr.
- China May Non-manufacturing PMI out at 54.3 vs. 54.5 in Apr.
- Australia Apr. Retail Sales out at +0.2% MoM vs. +0.3% expected
- China May HSBC Manufacturing PMI out at 49.2 vs. 49.6 expected and 50.4 in Apr.
- Sweden May Swedbank PMI out at 51.9 vs. 50.2 expected and 49.6 in Apr.
- Norway May PMI out at 52.0 vs. 49.5 expected and 49.2 in Apr.
- Poland May Manufacturing PMI out at 48 vs. 47.7 expected and 46.9 in Apr.
- Spain May Manufacturing PMI out at 48.1 vs. 45.5 expected and 44.7 in Apr.
- Switzerland May Manufacturing PMI out at 52.2 vs. 50.8 expected and 50.2 in Apr.
- Italy May Manufacturing PMI out at 47.3 vs. 46.2 expected and 45.5 in Apr.
- France May Final Manufacturing PMI revised up to 46.4 vs. 45.5 original estimate and vs. 44.4 in Apr.
- Germany May Final Manufacturing PMI revised up to 49.4 vs. 49.0 original estimate and vs. 48.1 in Apr.
- Euro Zone May Final Manufacturing PMI revised up to 48.3 vs. 47.8 original estimate and vs. 46.7 in Apr.
- UK May Manufacturing PMI out at 51.3 vs. 50.3 expected and 50.2 in Apr.
Upcoming Economic Calendar Highlights (all times GMT)
- US Apr. Construction Spending (1400)
- US May ISM Manufacturing (1400)
- US May Vehicle Sales (2100)
- UK May BRC Sales Like-for-Like (2301)
- Australia Q1 Current Account Balance (0130)
- Australia RBA Cash Target (0430)