FX Daily Strategy: Asia, April 23rd
PMIs the main data focus
More potential for impact from European numbers
BoE speakers will be more closely watched after Ramsden comments on Friday
USD/JPY still playing grandmother’s footsteps with the BoJ
PMIs the main data focus
More potential for impact from European numbers
BoE speakers will be more closely watched after Ramsden comments on Friday
USD/JPY still playing grandmother’s footsteps with the BoJ
Tuesday is PMI day, and the market consensus is looking for a modest improvement in both the Eurozone and US numbers, with little change in the UK. There is not usually much attention paid to the Australian or Japanese numbers. The European data typically has more impact than the US data, partly because the US remains more focused on the ISM survey. This is even more likely to be the case this time around, as there looks to be more flexibility on market pricing of the ECB and Bank of England than there is on the Fed. It would be a surprise if the PMI data affected Fed thinking, which has been influenced by the recent strong CPI data and it will require evidence from the inflation data to change market perceptions. The US is in any case seen to be achieving solid growth almost regardless of the PMI data, and the first Fed rate cuts is now not seen until September, so it will require something radical from PMIs to restore expectations of a July move.
There is more room for impact from the European PMIs because the PMI data is taken more seriously as an indicator of activity, and because both the ECB and the Bank of England rate decisions are seen to be in the balance for June. There is also more uncertainty about whether there is an economic recovery underway in Europe, with the latest PM I data certainly more encouraging on that front. Both the ECB and Bank of England are now priced as around a 60% chance of cutting rates at their respective June meetings, so significant evidence from the PMI data could bump this one way or the other. The risks may be marginally towards softer numbers after the recent improvements, but are close to evenly balanced.
For the UK, there has been quite a significant rise in rate cut expectations since Friday when MPC member and deputy governor Dave Ramsden indicated a more dovish than expected view. There are speeches on Tuesday from other MPC members Haskel (hawk) and Pill (chief economist and probably the most influential after Bailey). EUR/GBP rise quite significantly on Ramsden’s comments, but unless Pill is clearly dovish, it may be hard to extend GBP gains unless there is clear weakness in the PMIs.
The upward pressure on USD/JPY continued on Monday. For almost the whole of the European session, it traded within 10 pips of the 154.79 34 year high that was hit last week, without quite breaking it. This probably doesn’t reflect BoJ intervention, but there may be some BoJ/MoF influence being brought to bear. As we note in this week’s FX weekly, we doubt that intervention has the capacity to turn the trend, but it could slow things down and wouldn’t come as a big surprise if we see a break above 155, especially if EUR/JPY is also breaking higher. But it will require lower US yields or lower US equities – or both – to turn the trend.