Chicago PMI reduces downside ISM risk; other PMIs not so bullish but risk remains supported.
CHF safe haven unwinds proceeds apace – more to come.
Central banks may not be buying euros but real money now is and leveraged accounts may soon have to.
Yesterday’s better-than-expected Chicago PMI survey was a relative outlier in the series of global PMIs, but risk has remained supported nonetheless. In China the survey came in at a disappointing 50.9 from 52.0 in May, but the fall had been telegraphed by a previous survey and did not significantly dent Asian risk appetite. The Eurozone survey matched expectations, but continued to highlight the contrasting fortunes of the core and periphery. The greatest impact was seen from the UK PMI, which fell to its lowest in 21 months, in turn sending EURGBP to a 15-month high of 0.9084.
Today’s focus will be squarely upon the ISM, but the positive Chicago PMI release has sharply reduced the prospect of a significant negative surprise; while we hold our forecast at 51.0, we acknowledge increased upside risk. A print in the region of the consensus 52.0 level would suggest that the post-Greek budget rally is likely to have further legs, although with the market looking forward to the holiday weekend in the US, a continuation of the move higher may have to wait until next week.
The Eurogroup is expected to rubber-stamp the next tranche of aid to Greece over the weekend, and so focus for the EUR will move quickly to the ECB. There is little doubt that the well flagged rate rise will be delivered after Mr Trichet’s repetition of strong vigilance at the EU Parliament, but the question is what signals will be sent about subsequent moves. ‘Faster and higher than the market is currently priced for’ remains our view, and is one important driver of our forecast for EURUSD to surpass 1.50 in Q3. Real money now looks to be more comfortably raising its euro exposure while the leveraged community has given up being short without yet getting long en masse. We expect private sector flows alone to be capable of driving EURUSD higher even if (and as the Q1 IMF COFER data suggest) central banks have not been nearly as active buying euros so far this year as we had previously supposed.
The unwind of the CHF safe haven trade was very much in evidence yesterday, but we see scope for EURCHF to extend gains well beyond the two big figures seen so far. The same goes for various CHF crosses vs. risk/commodity currencies, including an extension of the downside on CHFSEK. On USDCHF, watch critical resistance at 0.8570.
Note that corn futures suffered their steepest fall in 15 years after record prices prompted US farmers to defy wet spring weather to plant a sharply increased acreage of the grain. As the FT noted, the decline in the corn (maize) price – if it persists – could help support the Fed’s view that the recent rise in US inflation is likely transitory. This may be so, although oil prices will be more important; crude has managed to hold onto to its $5 gains of the prior two days despite suggestions that there could be further releases of strategic petroleum reserves beyond the 60mln barrels announce last week. While oil holds without harming equities, USDCAD should at least hold its break down to the 0.9650 area and could well now extend to below 0.96 the figure.
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BNP Paribas
Corporate & Investment Banking