– Markets sluggish on Chinese PMI; AUD heavy on crosses
Markets are sluggish in holiday-thinned Asian markets today with Chinese data yet again disappointing. The official NBS PMI came in contractionary territory for the second straight month (the first consecutive sequence since 2009) and following the weekend HSBC PMI (contracted 11th month). While AUDUSD could be under some pressure, it should find support on dips with USD likely to be hurt by soft data (more below). However, AUD crosses should trade heavier; AUDNZD in particular broke below key support on Friday near 1.2560 (support drawn from the 2009 lows) and this cross could continue to grind lower. Tomorrow’s RBA meeting will provide the next catalyst for AUD; the market pricing for a 25bps rate cut increased a little (around 80% priced up from near 65% priced last week). Thus tomorrow’s RBA meeting presents quite a risk to short AUD positions should they decide to stand pat. Meanwhile, the Japanese Q3 Tankan came in soft, but less than expected and CAPEX actually surprised positively. Reports suggest that Japan PM Noda will pick senior lawmaker Jojima as Finance Minister (an unknown), and hence focus will be on his mind set towards intervention.
– USD can weaken on expectations for softer Friday NFP data
Last week’s USD strength should be temporary and driven by month- and quarter-end flows. The USD weakness trend should resume should US data- particularly the upcoming Friday’s non-farm payrolls report, come in weak. The labour market data will be very important as it is the first report after the Fed initiated open-ended QE which linked to the performance of the labour market. Our economists forecast Friday’s non-farm payroll data to come at 75k (vs. 111K consensus). This would be below 100k for the second month in a row. This should see the USD trade weaker. The other set of data releases, including ISM and non-manufacturing ISM, are likely to soften for the month of September. Our USD bearish view is likely to come to fruition as the Fed will see the need to keep expanding its balance sheet until year-end 2013 or mid-2014. We continue to favour long NZDUSD.
– EUR to be driven by expectation of Spain request for aid; ECB will be in focus
The EUR has been driven by expectations of a strong ECB response to lower sovereign debt risk premia, something we believe has improved the EUR outlook. However ECB action is dependent on governments requesting assistance, hence the day to day EUR movements will be driven by expectations for when Spain requests formal aid. Our economists believe Spain is edging closer to asking for aid [See Macro Matters, Spain: Hostage to Catalonia (among other things)] but believe it will be a long, slow process. Following last week’s Spain budget announcement and bank stress test results, the eurospecific focus shifts to next Monday’s (Oct 8) Euro group meeting. The hope is that the Euro group takes a positive view on reform measures, allowing the Spanish Government to spin any bailout as a reward for reform. But uncertainty is high, and the Oct 21 regional elections and Catalonia’s call for an election in November do not help. Thursday’s ECB meeting will be of some focus this week (our economists look for a move in policy rates in December). With market risks considerably abating since the announcement of the OMT framework, the ECB will feel less pressure to consider additional measures.
– UK PMIs this week should support positive growth momentum
UK Manufacturing PMI on Monday will likely deteriorate further, falling to 48 for September vs. 49.2 in August. But, the Services PMI on 3 October is a more important indicator of the UK economy, given that the services sector makes up more than 70% of the UK economy. While we expect the PMIs to decline slightly, they should remain at levels supporting positive growth momentum. Generally, the data out of the UK over the past week indicate that the UK economy is strengthening and doing much better than the euro zone. Signs that the UK economy is on the right track reaffirms our bullish GBP view. We look for any dips in GBPUSD to 1.6000 to establish a long position targeting 1.6700.
BNP Paribas