Near-term outlook for the dollar, without resorting to inflammatory and unproven claims.
Overview of the price action in the forward exchange market and a look ahead.
All around Asia, PMIs are tumbling... except for China's government-sponsored Manufacturing PMI. This week saw Aussie Services PMI (linked significantly to China) tumbled to 2014 lows, Japan's PMI drop, and China's own Services PMI disappoint and fade to 2-month lows. So where is all this exuberance coming from in China's manufacturing industry (despite a 8-month in a row drop in employment)? We don't know; but the fact that China coal prices just hit a record low hardly supports the smog-choking industry of China being at 7-month highs... Hard data vs soft surveys? You decide.
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All around Asia, PMIs are tumbling. The last few days saw a number of nations' manufacturing PMIs drop with the notable miraculous surge in China (at 2014 highs). Tonight saw the Services PMI side also tumbling with Australia first (at 2014 lows) and Japan fade back to 49 for its 3rd month in contraction. But (unlike the manufacturing side) China 'official' Services PMI faded from its rebound (55 vs 55.5). The drop in Services PMI makes some sense given the 8-month lows in employment indices within the manufacturing PMIs... But then the baffle 'em with total bullshit brigade arrived as Markit/HSBC unveiled their version of Services PMI which jumped to 53.1 - its biggest MoM on record - makes perfect sense.
It appears it's one of those nights. In a fit of confusion, Australia's Central Bank head Glenn Stevens declared "investors are under-estimating the chance of an AUD decline" only to follow that 'jawboning' up with an explanation that he is trying "to avoid shifting language or jawboning." But then he broke the cardinal rule of central-banking - he told the truth:
*STEVENS: PEOPLE SHOULDN'T ASSUME HOUSE PRICES ALWAYS RISE
But.. but.. but... Ben Bernanke said... The AUD plunged over 50 pips on the news (but like any good central bank non-jawbone is suffering from a short half-life).
Tonight's round of baffle 'em with bullshit is courtesy of a diverging AsiaPacific economic picture that is anything but supportive of the 'reality' being painted by China's official PMI (which printed at 51.0 as per expectations at 2014 highs) followed by HSBC China PMI which missed its flash estimate (with employment dropping to 8mo lows). South Korea PMI collapsed to 10-month lows; Aussie PMI faded further into contraction at 48.9; and then Japan's Tankan dramatically missed expectations, tumbling to 9-month lows (only to be followed by a 51.1 Japan print (3-month highs). Just to complete the "picture", Chinese home prices fell for the first time in over 2 years. The result, USDJPY rallies and Nikkei 225 soars 200 points... baffled?
If yesterday's non-record, red-tick close can be attributed to algos applying the wrong ISM seasonal factor to the day, believing it was Wednesday instead of the permabullish Tuesday, today there is no such excuse, which is why we fully expect the unallowed redness with which futures are currently trading to promptly morph into a non-red color especially with the USDJPY doing it best to ramp to 103.000 levels overnight, stopping out all shorts, and push spoos to fresh record highs. It is an algo world after all. It appears that already record low volatility is being pushed even lower in anticipation of numerous imminent data releases, including today's ADP and Services ISM (first, second and final release), tomorrow's ECB announcement and Friday's payrolls number. Which while good for low volume levitation means bank trading revenues continue to deteriorate forcing banks to pitch M&A deals to clients, which in turn result in even more synergies and more layoffs: because in order to preserve the bottom line, crushing real employment further is perfectly acceptable collateral damage.
Could the euro rally on a 10-15 bp cut in key rates? Technical indicators suggest this may be likely.
The near-term outlook for the US dollar appears to be improving. Here is why.
As we noted in the pre-open this morning, with the weekend just around the corner, it was virtually assured that the S&P would close at an all time high today - after all the people need to be confident when they go shopping at malls with money they don't have (but delighted by paper profits they haven't booked) so they boost the US non-GAAP GDP (at least before the BEA too, like Italy, changes the definition of GDP to include cocaine and hookers). Finally, assuring a (likely record) low-volume levitation today is the early closure of the bond pit ahead of Memorial Day holiday which also means only a skeleton crew of algos will be frontrunning each other to push the S&P over 1,900. Summing it all up perfectly - VIX closed at 15-month lows, Russell 2000 had its best week in 3 months, and Treasury yields are 13bps lower than when the S&P was last here... un-rigged.
Here is the technical reasons why the euro, sterling and Swiss franc retreat is a likely a correction rather than a change of the underlying trend. US 10-year yields near lows and a recovery could lift the greenback vs JPY.
Despite Mario Draghi and Janet Yellen's (repeat) attempt to steal the show today, the first when the ECB reports its monetary decision (with zero real chance of announcing any change in policy considering all the furious, and failed, attempts to jawbone the Euro lower) as it faces the dilemma of deflationary pressure, record low bond yields and interest rates at record lows coupled with an export crushing Euro just shy of 1.40, and a practical impossibility to conduct QE even as the hawks jawbone a "potential" European QE to death, while Janet Yellen conducts the second part of the congressional testimony this time before the Senate Budget Committee where she will again, say nothing at all, it appears the world will be focused on Russia once again after the latest 24 hour "de-escalation" gambit is now once again dead and buried and on top of it is Putin waving a "come launch a nuclear attack at me, bro" flag.
Some thoughts about the price action, or lack thereof, in the foreign exchange market.
On the heels of disappointing March data in China for Services and Manufacturing, China's "official" manufacturing PMI saw its lowest 'April' print on record (typically a period of renaissance post-New Year data snafus) missing expectations for the first time in 2014 and just marginally above last month's data (50.4, exp. 50.5, prev. 50.3) China is still in Schrodinger-land with "official' data (biased towards larger SOEs) in very modest expansion and Markit (weighted towards smaller - more realistic - entities) in considerable contraction. That China disappointment follows earlier data which saw Aussie PMI collapsed over 3 points in April to its lowest in 9 months with the deterioration broad-based across the key sub-components. As Goldman notes, production is now at its weakest in a year, employment remains in contraction and, most worryingly, new orders printed their largest contraction in 13 months. This is the 6th month in a row of Aussie manufacturing contraction.