Faith beating fundamentals
Unfortunately for us data watchers, trade seems to be still dominated by fears from Chinese and commodity markets and not a function of what individual companies are doing. Canadian GDP was a prime example yesterday; the Canadian economy falling into recession, albeit a shallower one than analysts had forecast. CAD strength, however, was halted in its tracks by falling oil prices and a slump on regional equity markets.
Sterling has only the UK economy to blame for its underperformance yesterday following a worse than expected slowing of the manufacturing sector. The UK’s PMI fell to 51.5 vs an expected rise to 52.0, with pressures, as we had thought, coming from lower prices. The culprits of this are the obvious falls in oil prices and the strength of the pound. The influx of Chinese deflation is yet to hit these shores but surely will in the coming six months.
Currency war rumbling continuing
The impact of the weaker yuan and the competitive devaluation that it may still cause in currency markets has to remain a concern. Last week’s comments from ECB member Praet that additional asset purchases may be needed following EUR/USD’s run to 1.15 was about as subtle as a car bomb. He should follow the line of SNB President Jordan in continuing to reiterate that the Swiss franc is ‘markedly overvalued’ and that it may intervene to weaken it. Go for it Thomas, maybe set a cap for the CHF against the euro at a certain level? How about 1.20?
Stagnating Matilda
One currency that has fallen well throughout 2015 is the Australian dollar, and the overnight read of Australia’s economic footing showed why. Gross domestic product advanced 0.2 percent from the first three months of the year, when it rose 0.9 percent, government data showed on Wednesday. That compared with the market estimate of a 0.4 percent gain. I think that we may be close to a bottom in AUD, although the occluded picture from China is an obvious risk to that forecast.
The day ahead
Focus today following yesterday’s poor manufacturing ISM from the States – similar to the UK’s in that concern around the strength of the dollar and a weak export outlook – will be on the US manufacturing and jobs markets. Factory orders are expected to remain positive in July following a decent increase in durable goods orders last week. ADP employment gain has typically understated the far more important Non-Farm Payrolls number by 27,000 jobs over the course of the past 10 years, with that average coming down to 4,000 in the past 12 months. Investors will be looking for any hints as to Friday’s jobs report today at 13.15.