- ISM gives USD and CAD a boost, but ADP may reverse USD gains
US equity markets forged higher with the upside surprise in the ISM manufacturing survey a contributing factor, only to give back a big chunk of the gains in the last hour and for no obvious fundamental reason. The improvement in the ISM survey was broad based and is consistent with the moderate expansion in the manufacturing sector continuing in the coming months. The positive US data boosted the USD and left CAD as the top performer within G10 (ignoring bad US data while keying off positive news has been a key characteristic of the ‘loonie’ of late). As long as the US economy improves, Canada should as well, thereby allowing the BoC to following through on its recent tightening bias. Overall, the moves in the markets over the past few days suggest that positive US data surprises are USD supportive in so far as they imply a greater risk of no fresh stimulus post the expiry of ‘Twist’ in June. Weak data puts more Fed stimulus back on the table, bringing USD closer to its knees, providing it does not sour market risk appetite too much. The debate among FOMC officials continues, Atlanta Fed President Lockhart (centrist) noting that he was a bit reluctant to pull the trigger on new action, in contrast to Chicago Fed President Evans (uber-dove) who commented that the Fed has room to ease. If Fed easing thus remains data-dependent, there is no more important data than employment data. However, we see today’s ADP payroll report as likely to disappoint, calling as we are for +140k vs. consensus of +175k. While the ADP has generally been a poor indicator of NFP, a weak number may nonetheless weigh on sentiment and on expectations for what is to come from Friday’s payroll numbers. We hear more from Fed governors Tarullo and Lacker later today.
- Moody’s warns on Japanese fiscal reform
Moody’s has delivered a timely reminder of the importance of fiscal reform ahead of parliamentary deliberations on the consumption tax hike bill, set to begin next week. The return of DPJ heavyweight Ozawa is seen as complicating the already difficult passage of the bill, and we remain of the view that further sustained BoJ easing (and possible associated JPY weakness) is only likely if progress is made on fiscal reform. But Moody’s suggests that yet another postponement on reform might not be without its own negative consequences, a point the BoJ has made on many occasions but to little avail. The ratings agency says that failure to act could have a credit impact, and warns of the potential for JGB market turmoil, saying that the BoJ is ‘already monetizing debt to a certain extent.’
- Riksbank minutes could push EURSEK lower
The Riksbank minutes may provide the necessary jolt to bring EURSEK lower. The Riksbank left rates unchanged at its 18 April meeting and was much more optimistic on the domestic economy. While the statement already noted that the reporate path is also unchanged, further optimism on the economy should be supportive for SEK. The argument for a lower EURSEK is also justified by our STEER model, which suggests that EURSEK appears vulnerable to moving closer to its current fair-value of 8.75. Data on the euro front is skimpy for today; final Eurozone PMI releases are forecast to be unchanged, if so leaving data out of the picture as a driver for the euro today. Meanwhile, EURCHF has failed to trade much above the 1.20 floor, and the expected uptick in the Swiss Manufacturing PMI is unlikely to be able to change this.
- Short NZDCAD conviction further supported
The latest Fonterra dairy auction results showed a 2.4% decline in the “trade weighted index”. This follows a near 10% fall from the last auction, which took place two weeks ago; and this morning’s NZ commodity price index confirmed this declining trend. Coupled with the RBNZ potentially shifting gears after the surprise rate cut from the RBA, this strengthens our conviction in our short NZDCAD call. In addition, BoC’s Carney reiterated that higher interest rates might be needed. While the CAD sold off on Monday following the weak Canadian GDP-proxy release – a very volatile number – the BoC is evidently adhering to its newly declared tightening bias.
BNP Paribas