- A weak China PMI to leave commodity currencies vulnerable to further downside
- Eurozone PMIs to push EURUSD to lower end of the 1.41-1.45 range
- JPY and CHF to find support on increased risk aversion
A quiet calendar on Monday opened the way to a risk on environment, allowing equity markets to close on a positive note and high beta currencies like NZD and SEK to outperform. With markets consumed with prospects of a global economic slowdown, markets are fragile and so no news is good news.
Thus, Monday’s market performance is likely to be short-lived. A slew of economic activity data is on the calendar, starting with the HSBC China PMI this morning (rumoured in the NY market to be very weak). This would be a severe setback since the hope was that local markets would drive global growth amid the slowdown in developed markets. However, a clear weakening in PMI readings to well below 50 this month would destroy the decoupling story and put commodities and commodity currencies under pressure. Thus, AUDUSD in particular looks vulnerable to a setback towards 1.0328, the 200-day moving average.
The Chinese HSBC PMI should set the tone for the Asia session until the Eurozone growth surveys (PMI and ZEW). We expect the European PMI to deteriorate pointing to much slower growth in H2. The new orders sub-index has been below 50 since June and is set to weaken in August given the increased uncertainty and stress that has gripped the markets over the summer months. German ZEW is expected to deteriorate sharply. We expect current conditions and expectations to come in at 75.6 and -25.1, respectively, while consensus is looking for 85 and -26, respectively. If the numbers disappoint then EURUSD is likely to trade towards the lower end of the 1.41-1.45 range.
As such, ‘safe haven’ currencies like CHF and JPY should be well supported. The wrath of a stronger CHF will be revealed in today’s trade numbers. Consensus is looking for a decline in real exports of 2.5% in July from a 5.2% increase in June. EURCHF traded below 1.200 for much of the month of July, and so the Swiss trade numbers may finally show the impact of the strong franc on the economy. Expectations that the SNB may peg the franc to the euro persist as EURCHF continues to trade in a tight range. While a peg cannot be ruled out, we believe that it is unlikely to happen. The SNB has resorted to other measures and avoided a peg even when EURCHF traded near parity.
Meanwhile, potential support for JPY means more clamour from Japanese officials. While intervention is a risk, reports suggest that the BoJ will discuss further easing measures at its 6/7 September policy meeting, saying that the meeting could be moved up if yen pressures worsen. Political calculations ahead of DPJ elections at the end of the week suggest intervention in the early part of the week is less likely: While a show of force by candidate and current FinMin Noda might boost his standing, a retracement of any intervention rally would leave him looking more powerless than powerful. Market confidence in fading any intervention driven spike is going to remain high.
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BNP Paribas
Corporate & Investment Banking