– Asian equities down 1-2% weakening Asian FX, but G10 less so
– China’s July services PMI rose in line with its seasonal factor
– UK, Europe and US services PMIs expected to be weak
– ADP expected at 100k
What to watch for today
EUR: More growth risk from services PMIs. The consensus forecast is for the Italian services PMI to drop to 47.0 in July from 47.4 in June. No revision is expected for the final euro zone PMI data from the flash estimates. Evidence of further slowing in euro area growth would likely add to upward pressure on Italian outright yields and spreads in Germany. Weak data would likely lead markets to expect a less hawkish ECB stance at this Thursday’s policy meeting.
GBP: Weak services PMI. Our economists expect that the services PMI fell to 53.0 in July from 53.9 in June, below the consensus forecast of 53.2. If in line with or below market estimates, the data would likely reinforce expectations of an extended dovish shift in the MPC’s stance, resulting in additional GBP weakness, in our view. We remain bearish on sterling and expect EURGBP to trade up to 0.91 in three months.
USD: ADP and ISM non-manufacturing. The consensus forecast is for a +100k reading on ADP. This would be roughly in line with the consensus estimate for Friday’s payrolls data to show that private payrolls rose 115k in July. We note that the median estimate for Friday’s payroll data has been revised lower from last week in the aftermath of the weak ISM data. We expect the ISM non-manufacturing index to fall to 53.0 in July from 53.3 in June. Further US data disappointments are likely to push EURUSD, EURCHF, and USDJPY lower.
What happened overnight
Further falls in Asian equities have driven the broad FX market to begin to recouple with EURUSD. Asian equities sold off 1-2%, while front end implied FX vols are higher. Initial falls in G10 currencies against the USD have moderated and EURCHF has bounced slightly off of its overnight low. AUDUSD traded down to 1.074 before bouncing after Australia’s retail sales fell for a second consecutive month, printing -0.1%mom in June. The Australian trade surplus also narrowed more than expected to AUD2.05bn in June. EURUSD is trading near the NY close at around 1.42, while EURCHF had a modest bounce to 1.089. In contrast, most Asian currencies have weakened against the dollar in a delayed response to the fall on Wall Street.
USD: Moody’s reaffirmed its US AAA rating with a negative outlook after US President Obama signed the US debt ceiling bill into law yesterday. S&P has yet to comment, but we continue to see a high risk it will downgrade the US to AA+. China’s credit rating agency, Dagong Global, announced a downgrade of its US sovereign rating to A from A+. This is its second downgrade after Dagong had lowered US ratings to A+ from AA in November 2010.
CNY: Resilient service sector. China’s non-manufacturing PMI rose to 59.6 in July from 57.0 in June. This is largely in line with the typical seasonal gain of about 2.7 index points. The resilient service sector supports our view that China’s growth is only moderating and not heading into a “hard landing”. We remain of the view that monetary policy remains in at tightening mode. We continue to see USDCNY trending lower and recommend being short the 3-month USDCNY NDF (FX Strategist – Ways to position for USDCNY downside, 27 July 2011).
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Credit Suisse
FIXED INCOME RESEARCH & ANALYTICS