FX Daily Strategy: APAC, August 21st

EUR may slip if Eurozone PMIs suffer from EU/US trade deal

USD could be vulnerable to gains in continuing claims

USD may also weaken as US PMIs likely to fall

USD/JPY remains the main candidate for a big move

Thursday sees PMI surveys, jobless claims data for the survey week of the August employment report, and the Philly Fed survey so contains most of the important data of the week. The European PMI data usually attracts the most attention, as it has shown the best contemporaneous correlation with GDP. In July, the Composite PMI rose to 50.9 from 50.6 in June. We see little change in what may be the first broad insight into how companies have actually reacted to the EU-U.S. trade ‘deal’, but the risks may be on the downside, suggesting downside risks for the EUR against the USD and JPY.

The jobless claims numbers will attract more attention than usual because they relate to the employment report survey week. The initial claims data hasn’t shown any persistent significant increase thus far, while continuing claims have risen steadily for the last few years. The continuing claims data does suggests upside risks to the unemployment rate, with the lack of increase in initial claims potentially reflecting low hiring rather than increasing layoffs. The fact that the unemployment rate has been steady for the last year even though employment growth has been slowing has been one factor limiting the pressure for the Fed to ease. But a further rise in continuing claims might be a signal that this is about to change, so the USD could be sensitive to any continuing claims strength, even if initial claims remain subdued.  

There will also be interest in the US PMIs given the surprising strength in July. We expect August S and P PMIs to show slippage in manufacturing to 49.5 from 49.8, and services to 53.0 from July’s surprisingly strong 55.7. The market is looking for a slightly smaller decline, so there may be some USD disappointment in the data.

On Wednesday the USD fell back in part because of the Trump call for Fed governor Lisa Cook to resign due to accusations of mortgage fraud. While Cook is a moderate, and has recently expressed concern about the weakening employment picture so would seem likely to vote on the dovish side in September, any Trump interference in the Fed is seen as USD negative. Moves were fairly modest, but with equities also slipping lower, the USD showed weakness against the safer havens, with USD/JPY seeing the biggest move. USD/JPY remains the main candidate for a large move among the majors, as yield spreads suggests it is too high, valuation remains extreme, and any equity market weakness will help the JPY both against the USD and on the crosses.