05.08.2013, Time of writing: 03:30 GMT The Big Picture NFP hangover (cured in part by milk): The dollar is still suffering from a hangover after Friday’s disappointing non-farm payrolls. USD was lower this morning against most G10 currencies, the notable exception being the three commodity currencies, which all lost ground. The decline in the commodity currencies may be due more to individual factors than to any overarching factor. The big loser was the NZD, which fell sharply after China halted milk powder imports from Fonterra, the dominant milk producer in the country. The weakness in AUD and CAD was more surprising though as it was announced over the weekend that China’s official service-sector PMI rose to 54.1 in July from 53.9 in June, suggesting that the slowdown in China may be moderating. The CAD may be weakening because of its high beta relative to the US economy; if US activity is slowing (something I’m not sure of, but the employment data certainly suggests that), then the Canadian economy is not likely to grow as much as investors had thought. AUD though is probably weakening ahead of the Reserve Bank of Australia’s rate-setting meeting tomorrow morning our time. The punditocracy is nearly unanimous in expecting a 25 bps cut in the cash rate target to 2.50. Investors expect that to be the last of the rate cuts, although the futures market implies there is still a small possibility of another cut sometime by next March. Accordingly, we could get a bounce in AUD after the meeting, assuming that the RBA does make some statement corroborating the view that this is the bottom. The speculative community is massively short AUD; the currency is down about 16% vs USD since its recent peak on 11 April and the Commitment of Traders report shows speculative accounts with 72,600 net short position, the largest net short ever for AUD and the second-largest net short of all the currencies at the moment (after JPY). If the rate-cutting cycle is coming to an end, there could be some (brief) profit-taking on these positions, although the continued erosion of the terms of trade caused by China’s slowdown will probably keep AUD on a declining trend longer-term. In any event, we would be buyers of USD on this weakness. Believe it or not, on average the dollar gains more in the week following a miss in the non-farm payrolls than it does on average when the data beats estimates. Of course past performance is no guarantee of future performance, but in any case I am still a long-term dollar bull for fundamental reasons and even more so now with better entry levels. The rest of the service sector PMIs are due out today, with the initial number out for the UK, Italy, Switzerland and a number of other countries, while the final German, French, and overall EU numbers will be released. Later in the day comes the equivalent for the US, the service-sector ISM index. We also have June retail sales for the Eurozone, which is expected to be down 0.7% mom, a turnaround from +1.0% in May – possibly EUR-negative.
Posted on: Tue, 06 Aug 2013 01:27:08 +0000
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