- Commodities: Iron ore surged 4.5% to a fresh five-year high of $123.35, boosted by forecasts of declining Australian export shipments.
- US manufacturing PMIs weren’t as weak as feared. The US manufacturing ISM survey for June encouragingly fell less than expected - to 51.7 from 52.1 - thanks to firmer production and employment sub-indices, but the key forward looking new orders sub index stalled to a 3 ½ year low of 50.0. Markit’s manufacturing PMI was revised a touch higher to 50.6 from a preliminary estimate of 50.1.
- Eurozone’s final Markit manufacturing PMI for June was below its flash reading at 47.6 (flash 47.8, prior 47.7) with respondents citing no sign of an end to the slowdown and notably weak forward looking components.
- Other national and periphery PMI’s in the EU were also weaker than estimated. Of note, UK’s manufacturing PMI showed a deeper pullback from the Brexit related stockpiling seen earlier in the year which had been a boost to activity. The June release slipped to 48.0 (est. 49.5, prior 49.4)
- EU leaders failed to agree on any replacements for the key EU roles that become vacant at end October. There will be a further extension of talks into Tuesday to attempt to find consensus. The delay is also impacting other EU business, including the now delayed response to Italy’s contentious fiscal stance
- The US dollar index is up 0.6% on the day, helped by the relative outperformance of US vs global PMIs.
- EUR fell from 1.1360 to 1.1280, with dovish ECB comments from new chief economist Lane contributing.
- USD/JPY ranged sideways between 108.20 and 108.53.
- AUD performed poorly ahead of today’s RBA decision, falling from 0.7005 to 0.6956.
- NZD also reversed sharply, falling from 0.6720 to 0.6665.
- AUD/NZD continued to probe lower, touching 1.0427 – a three-month low.
RBA is in immediate focus on a busy schedule for the week ahead.
AUD/USD has been one of the worst affected by the cease-fire in trade wars between Washington and Beijing from the weekend's meeting between Trump and Xi on the side-line’s of the G20 summit.
Looking ahead, the Reserve Bank of Australia will be making its interest decision today on a week where a great number of data releases are streaming in from the U.S. We have already seen today's ISM and Markit Manufacturing PMI giving the dollar a boost arriving at 51.7 vs 51.0, 50.6 vs 50.1 respectively. However, the key focus will be with the end of week's normal first Friday of the month Nonfarm Payrolls.
Plenty of risk events on the radar
We look for payrolls to bounce to 150k in June, following the below-expectations 75k May print. Employment in the goods sector should remain soft, while we look for a modest rebound in the services sector. The household survey should show the unemployment rate remained steady at 3.6%, while wages are expected to rise 0.3% (3.2% y/y) on the back of a favourable reference week.
It’s a very busy week next week over in Australia too. Since having cut 0.25% from 1.50% to 1.25% on June 4, in his dovish speech at the start of start month Governor Lowe, who is also slated to speak today, referred to an “accumulation of evidence” that inflation pressures will remain subdued. He said that it is “not unrealistic to expect” another cut, so markets are pricing in a rate cut to 1% for today by around 70-75% chance.
We see risk of AUD/USD edging towards 0.67 by the end of the year. Australian GDP rose by 0.4% q/q in the first quarter of the year. The year-on-year growth rate of 1.7% was the slowest pace recorded since 2009. Given the backdrop of softening global growth and specifically a weakening Chinese economy, there are plenty of headwinds facing Australia.
Also, Parliament resuming where the focus will be on fiscal policy and the passage of PM Morrison’s tax package. May building approvals and merchandise trade balance and retail sales come later in the week.
Having called the dip back to the 0.6950/35 vicinity, the 50% retracement of the recent leg higher, AUD/USD has reached the 0.7022 the June peak and the April peak at 0.7069:
Event Risk Data Today
- NZ: Quarterly business confidence (NZIER) is out today. Firms’ deteriorated further in the March quarter, and monthly business confidence surveys suggest that there has been no
- Australia: The RBA meeting is expected to result in a 25bps cut in the cash rate (~70% of economists in the Bloomberg survey are calling a cut and similarly markets are pricing a ~75% likelihood). Later that evening, RBA Governor Lowe speaks at the RBA Board dinner in Darwin, 7:30 pm AEST.
- US: Fedspeak involves Williams on the global outlook at a conference in Zurich and Mester at the European Economic and Financial Centre in London.