FX DAILY STRATEGIST: US – 01 June 2011.

PMI data show decent growth but loss of momentum.

Data spell GBP trouble and AUD support.

EURUSD holds 1.44 but mixed noises from the Troika on Greek aid sees EURCHF drop like a stone.

US ADP and ISM on tap today.

This morning has been dominated by a slew of PMI data that suggests that the manufacturing sector globally is losing some momentum, but consistent with decent growth, keeping a risk on environment supported. While the Eurozone PMI came off slightly (54.6 vs. 54.8), the divergence in core vs. peripheral Europe remains. Spanish PMI fell below the 50 level to 48.2 in May for the first time in eight months. Meanwhile, UK PMI fell to 52.1 in May from 54.4 in April putting GBP under the cosh. While the manufacturing sector comprises a small percentage of the UK economy, the PMI services on Friday will be more important. Nevertheless, we expect EURGBP to head to at least the 0.8800 level, while we continue to hold on to our medium term GBPNOK short from 9.02 as the latter collapses.   Chinese manufacturing PMI – while moderating- came in relatively strong holding well above the 50 boom-bust barrier, helping the AUD to rebound in tow; it still has some catch-up to do and a break of AUDUSD 1.0750 would open the way for a more significant move towards the 1.0875 level. AUD was also supported by a better than feared Q1 GDP

Despite headlines Greek press report that a new deal with the troika is imminent, reports of a still unsatisfied IMF will keep things choppy.  While we have favoured EUR higher on a deal on another package – perhaps with some token ‘voluntary’ lengthening of maturities but not significant enough to really damage private investors – our concern was that EUR might come under renewed pressure in the gap between a negative troika report and any eventual agreement. While this report suggests they are moving quicker than expected towards an agreement, there are still conflicting signals as today’s news flow showed. Another report suggesting that the IMF aid tranche for Greece may not be forthcoming is testament to this, assuming there are still some frictions within the Troika. Given that any proposed deal is likely to run into opposition not only from within Greece, but also from creditor countries; and perhaps even from some of the smaller EU countries uncomfortable with the implications for sovereignty of EU involvement in internal Greek affairs- there’s plenty of room for volatility between now and any approval of a final package at the 20/24 June European meetings. However, we see this uncertainty manifested more through EURCHF which plunged like a stone today promoted further by still stellar Swiss data; the cross looks to be headed towards 1.2200, serving as insurance for any negative Greek headlines.

However, looking further out we see a rebound in risk as fears of Greek upheaval subside, suggesting a return towards the highs above 1.4900 by month-end. In the meantime, EURUSD is bid today but may struggle to break the 1.4500 level unless more supportive more details emerge.

Today’s key US ADP employment and manufacturing ISM will be crucial for USD. If ADP comes in close to consensus near 175k and ISM near 57.0 from 60.4, these still decent outcomes are likely not enough to see 10yr Treasuries test 3% – which looks to be a prerequisite USD testing Y80. If risk appetite holds in, JPY crosses can continue to push higher.

BNP Paribas
Corporate & Investment Banking