– Stronger UK PMI to see GBPUSD rally
The focus for G10 FX today will be the UK PMI which we expect to come in on the stronger side (49.50 vs. 48.30 consensus). This we believe should continue to underpin GBPUSD which has already reclaimed the 1.6100 level yesterday. Sterling will receive tactical support following diminishing expectations that the Bank of England unveils quantitative easing at next weeks meeting. Elsewhere the focus could be on US data with the release of both the ISM manufacturing and the ADP report. The latter could be difficult to gauge given there is a change in methodology behind the calculation of the data. Indeed, the September release has been halved (to 88.2k from 162k). The consensus on ADP today is for a 135K print. Our economists are looking for a weaker ISM manufacturing figure (50.5 vs. 51.1 consensus). Weaker US data should lead the USD weaker, though the reaction has by no means been clear cut as explained below. We retain our short USD recommendations against NZD, GBP and JPY.
– Earnings season clouding FX reaction to US data
Since the Fed announced its decision to buy MBS as part of its QE3 programme back in mid-September, the FX reaction to US data releases has been far from clear. October was a month peppered with stronger US data releases (e.g. ISM on Oct 1, NFP on Oct 5 and retail sales on Oct 15]. Gold and US treasury prices have been noticeably weaker in response to stronger US data, which can be reasoned to the extent stronger US data lowers the extent of future US treasury purchases under QE3. But the USD has not strengthened in response to stronger US data. One factor that may be clouding reaction could be earnings season which has been intense over the past month. Upward earnings surprises saw US equities rally in the first half of the month, and weaker results resulted in weaker share prices over the past fortnight. This could continue until earnings season ends in mid-November. But beyond this, we would expect the USD to remain noticeably weaker and risk-appetite stronger in response to weaker US data as the market begins to anticipate US treasury purchases by the Fed into 2013.
– Commodity currencies to hold in well
China’s official manufacturing Purchasing Managers Index rose to 50.2 in October from 49.8 in September while the HSBC China manufacturing PMI rose to a final reading of 49.5 in October from 47.9 in September. The new orders balance moved above 50 for the first time since April. Chinese share markets have all reacted positively this morning. Meanwhile, the Australia AIG manufacturing PMI has continued to remain in contractionary territory for 8 months. We would place more importance on improving China growth prospects and market sentiment for the AUDUSD. We believe that improving Chinarelated sentiment has returned in recent weeks to support the AUDUSD after several months of absence. The chart below compares the AUDUSD with the Hang Seng China Enterprises index. From Q3 onwards, while sentiment towards China remained negative, a positive risk-on environment (given ECB/ Fed actions) helped AUDUSD higher. As a result a wedge developed between these two market prices. The recent closing of this wedge suggests the more positive attitude towards China could see the AUD move higher from hereon. This factor can dominate over any impact coming from a November 7 RBA cut. Our China strategists look for more positive news coming from China leadership transition (November 18), with a possible removal of the one-child policy.
BNP Paribas