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Global PMIs Dominate Price Action

The new trading week has kicked off with a deluge of global PMI readings that has so far steered financial market price action, though the outcome has not been a resounding victory for either the bulls or bears.   Confidence was high  on Sunday  night after HSBC’s flash PMI manufacturing reading for China moved back into expansionary territory with a print of 50.8, the first time above the boom/bust level this year.   The positive reading on the health of businesses in China  had  currencies correlated with global growth seeing an uptick in  demand, with AUDUSD ripping above the 0.94 handle and putting downward pressure on the DXY to start the week.

Mitigating some of the optimism around  the  prospects for global growth was that fact that European PMIs came in well short of expectations, as France had another tough month with both manufacturing and service sectors seeing a faster contraction than was witnessed the month prior.   While Germany’s data was not as disappointing as  what was seen from France (both  manufacturing and service readings are well situated above the boom/bust level of 50), it was not enough to stop a  slide for the overall Eurozone, with the composite reading showing a slowing in momentum with a drop from 53.5  to 52.8.   The weak PMI numbers have put in jeopardy the EURs ability to establish itself above the 1.36 level  against the USD, helping the DXY  find somewhat  of a foothold  after the  strength in the commodity-complex  lead to softness in the big dollar.

Hydrocarbons  are  stable this morning, despite increased fighting in Iraq  as the ISIL seize more territory around Iraq’s borders with Jordan and Syria.    Front month WTI  is hovering just south of $107/barrel, while  its international brethren,  Brent, is finding equilibrium  just shy of $115/barrel.   The Loonie’s tear from  Friday  has managed to find renewed  vigor,  generating more demand after a strong Chinese PMI print increases the prospects for Canada’s export sector, and the soft PMIs from Europe have seen  macro sales of EURCAD, which has led to further  buying interest in the Loonie.   While valuations of USDCAD  appear stretched  at these levels,  Friday’s  close below the 200-day moving average (the first time  in over a year)  and the associated  follow-through today with more stops being run, doesn’t technically bode well for the pair.    That said,  while  Friday’s  data  challenges the Bank of Canada’s  dovish outlook for inflation and  perceived slack in the overall  economy,  higher energy prices and increased consumer demand are not the bastion of hope for the economy  investors  may be expecting.   In order for the Canadian economy to begin firing on all  cylinders, progress with business investment and stronger external demand will need to generated, transitioning away from such a heavy reliance on consumer debt.

The Week Ahead

In the wake of the global PMI numbers released earlier today, the last full week of the second quarter has a number of events that will attract attention from all corners of the globe.

After the Federal Reserve reassured financial markets that monetary policy conditions would be accommodating for quite some time, housing statistics set to drop early in the week will be a focal point for dollar traders and broader market participants.   While the housing market in Q2 has so far been a disappointment, the figures for May are expected to be slightly more optimistic, with the release of Existing Home Sales later today forecast to see a bump to 4.73M from the 4.65M registered in April.   Similarly, New Home sales look set to chalk up an annualized reading of 0.44M, better than the 0.43M that was posted in April.   While neither release is  expected to blow the doors off the hinges, a stabilization in the housing market would be dollar supportive, and help the DXY stem some of its bleeding after the dovish-commentary from Ms. Yellen last week.   In addition, the PCE deflator is also set to be reported at the end of the week, and as it is the Fed’s preferred inflation measure, a flat reading at the 1.4% mark would corroborate the Fed’s assessment medium-term inflation expectations remain well anchored and poses no treat to the central bank’s pro-growth bias.
Pound traders will also have their hands full this week, with the upward break of 1.70 against the dollar looking sustainable given the relative stances of monetary policy between the two central banks.   The key highlight for the week will be  on Thursday  when the Bank of England releases their Financial Stability Report and Governor Mark Carney holds a press conference to address the findings.   Given the Financial Policy Committee of the BoE is expected to recommend macro-prudential measures in order to try and slow the overheating housing market down, Carney’s associated commentary will be parsed to see if he reiterates his hawkish stance from a few weeks ago when he warned markets were underpricing a rate hike.   While a lot of the upward momentum in GBPUSD had been on the back of traders re-pricing interest rate expectations in the UK, a confirmation that steps are being taken to curb what could potentially be a housing bubble in London will likely defend a slippage below 1.70, though upside would generally be limited  with another spike like the one witnessed after Carney’s  Mansion House speech unlikely.
The Bank of Japan will eagerly be awaiting to see at what level of enthusiasm consumers returned to the stores with after the initial sticker shock of the tax hike in April.   The May numbers for consumer spending are forecast to show a m/o/m rise of 2.5% after the drastic 13.3% drop witnessed in April, potentially giving the central bank a little confidence the economy could quickly recover after the jolt from the tax increase.   Also on the docket for  Thursday  will be the release of the nationwide CPI figures in May, with more optimistic numbers forecast to show the core reading will come in with a y/o/y increase of 3.4%, better than the 3.2% experienced in April.   As the case with the rest of the global economy, higher energy prices are expected to contribute to the upward movement in the CPI index, though once you back out the effect of the sales tax hike the core reading will approximate a +1.4% y/o/y movement, not too shabby considering the BoJ’s target is 2.0%.   The further information on structural reforms from Shinzo Abe at the end of the week could be a slight let down if there is little announced past the corporate tax cut that is expected, though stronger readings on consumer spending and CPI could hamper USDJPY ability to make it north of 102 with any conviction.
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Scott Smith

Scott Smith

Scott Smith is a Senior Corporate Foreign Exchange Trader with Cambridge Mercantile Group and has a diverse background in the foreign exchange industry, with previous experience in both credit and trading related functions. Scott holds a Bachelor of Commerce degree from the University of Victoria, has completed all three levels of the Chartered Financial Analyst designation, and is currently working towards the Derivative Market Specialist certification offered through the Canadian Securities Institute. Cambridge Mercantile Group.