– AUD leads broad rally vs the USD
– UK manufacturing PMI is likely supportive of GBP
– US ADP and ISM manufacturing likely to affirm trend of growth slowing
– We recommended re-entering long EURUSD
What to watch for today
GBP: Potential surprise. Our economists expect the manufacturing PMI indicator to surprise strong to 55.2 in May, above the consensus forecast of 54.1. This would be in contrast with the steep decline experienced over the past two months. The short tenor sterling rates curve has bull flattened steadily over the past few weeks and we would view the near-term surprise risk as biased to the upside. We remain bearish on sterling against the euro but expect EURGBP to remain heavy until European peripheral stress abates.
NOK/SEK: PMI slowdown. The consensus forecast expects the Norwegian PMI to print 55.4 in May, down from 55.6 last month. Our economist forecasts a slightly below-consensus Swedish PMI reading of 59.2 in May. We would stress that, at projected levels, the surveys would remain consistent with continued robust activity. We remain bullish on SEK, forecasting EURSEK at 8.60 in three months, as we see potential for more aggressive tightening by the Riksbank than is currently priced by the market. While we are also constructive on growth in Norway, we think this is already to a large extent priced in and we are neutral on EURNOK at these levels.
USD: Employment and manufacturing pulse. The consensus forecast is for a 175K reading for May ADP employment, in line with last month’s 179K. Our economists expect the ISM manufacturing headline to fall to 57.5 in May from 60.4 in April, consistent with the consensus forecast. If in line with expectations, the data would continue the recent pattern of a general slowdown in economic activity. We expect US data to improve consistently from June on, and as such remain short USDMXN as a trade recommendation.
What happened overnight
G10 currencies continued to strengthen vs the USD in Asian trading. The AUD rallied 0.7% to 1.075 on stronger details in the Q1 Australian GDP report and a slightly better than expected Chinese PMI. EURUSD is holding on to a 2-week high around 1.4425 while USDJPY is slightly lower to 81.2. The SGD is leading Asian currencies’ appreciation vs the USD. Asian equities are mostly higher except for the Shanghai composite index, which is down 0.3%.
CNY: PMI points to continued slowdown. China’s May PMI fell 0.9pp to a 9-month low of 52.0, but was slightly better than the consensus forecast for 51.6. New orders fell 1.7pp to 52.1 while input prices fell 5.9pp to 60.3. The rising financing costs for small and medium-sized enterprises and power shortages in May likely led to a less optimistic outlook from manufacturers. However, we note that the Chinese government has raised electricity tariffs for June, which should work to improve electricity supply, but add to inflation. We think the slowing in Chinese industrial production is likely nearing a trough.
AUD: Strong GDP details. Australian GDP fell 1.2%qoq in 1Q, broadly in line with the Bloomberg consensus. The household savings rate jumped from 9.7% to 11.5%, income growth was very strong with compensation of employees up 3%qoq, and the terms of trade rose another 5.8%qoq. We expect the savings rate to begin moderating and consumption growth to begin rising later this year as the labor market tightens further, increasing household confidence. This is likely to put pressure on inflation and support our view that the RBA will hike at least once later this year. We remain bullish on AUDUSD, targeting 1.10 in three months.
KRW: Moderation in CPI inflation and trade surplus point to less won support. CPI inflation moderated further to 4.1%yoy in May from 4.2%yoy in March, below our economist’s forecast for a rebound to 4.6%yoy and only slightly above the Bank of Korea’s (BoK) inflation target range of 2% – 4%. We think this reduces the urgency for the BoK to use won appreciation to manage inflation. Furthermore, exports rose a lower than expected 23.5%yoy in May, narrowing the trade surplus to $2.7bn in May from a downwardly revised $5.1bn. We think the BoK will continue to use a mix of FX intervention and tighter capital controls to counter rapid moves below 1,070 and to limit won volatility.
What to do
We are re-entering a long EURUSD trade recommendation in our cash recommendations portfolio, reinstating a position that was stopped out on 23 May. We set our stop at 1.3970 and target a move up to 1.52. For more details please see our latest Strategy Snapshot, 31 May 2011.
As we argued in the latest Strategy Snapshot, 31 May 2011, we think the dollar seemed to be topping out. We expect German leadership to push European politics away from Greek restructuring, which would lead markets to turn against the USD. Confirmation of new lending for Greece would allow markets to shift focus from euro area peripheral sovereign risk back to global growth.
Our economists remain constructive on global growth and expect global growth momentum to accelerate back to 4.5% in Q3, after expanding at an estimated 3.7% rate this quarter (Global Economy: Monthly Review, 31 May 2011). We also think the data will improve a bit faster than the consensus expectation of slower global growth over the next couple of months.
The USD is likely to suffer from low yields and a dovish Fed. Furthermore, the House of Representatives voted down measures to raise the debt ceiling yesterday, and we think the ongoing debate on the ceiling is likely to keep US front end yields depressed. We think it is time to begin to build USD shorts, again focused on going long the EUR, AUD and the SEK. We are re-entering a long EURUSD trade recommendation in our cash recommendations portfolio.
Credit Suisse
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