Poor global manufacturing PMIs for June + renewed EU tariff threat snuff out mild G20 optimism

SUMMARY

ANALYSIS

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EURUSD

Euro/dollar is trading well off Friday’s closing levels this morning after a combination of bearish news items sent the market lower yesterday.  First we got weaker than expected June Manufacturing PMI data out of China, Korea, Germany, Italy, Spain and France, which put pressure on the EUR early.  Then we got a surprising beat on the US Manufacturing ISM (which prompted broad USD buying).  Finally, Washington threatened to slap tariffs on $4bln of EU goods amid their ongoing dispute over aircraft subsidies, and this has killed the mild optimism following the G20 and caused yet another rush into European bonds (German bund yields trading a new lows again today around -0.36%, French 10s plunging below 0%, Spanish 10s at new lows (0.31%) and Italian 10s plunging further to 1.86%...now yielding less than US 10s!).  Bloomberg came out with a story early this morning saying ECB officials see no rush for a July interest rate cut, and with that we’ve seen EURUSD extend higher after bouncing off chart support in the 1.1280s.  More here.  The leveraged funds mildly pared long positions during the week ending June 25, leaving their net short EURUSD position largely unchanged from the prior week’s 19-week low.  We think yesterday’s swift move lower below the 1.1330-60 trend-line support channel has now disrupted the market’s upward momentum following the Fed meeting, and we think this will now confine EURUSD to some range trading unfortunately.  Over 1blnEUR in options expire at 1.1295-1.1300 strikes this morning.  German reported weaker than expected Retail Sales data for the month of May today (-0.6% vs +0.5%).

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GBPUSD

Sterling is bouncing with the Euro this morning despite the UK reporting a dreadful Construction PMI for June earlier this morning (43.1 vs 49.3 expected).  Trend-line support in the low 1.26s has held and the market now looks poised to regain the 1.2640 support level that it lost in Asia trade and re-lost at the start of European trade today.  The Bank of England’s governor Carney will be speaking shortly now after 10amET.  The funds extended their net short GBPUSD position during the week ending June 25, and are now the most short they’ve been since January.  We continue to believe the poor timing of these new shorts over the last two weeks will support GBPUSD on dips, but we still think last Tuesday’s bearish outside day has relegated traders back into range-trade mode.

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AUDUSD

 The Reserve Bank of Australia (RBA) gave the bond market what it wanted yet again last night, and that was another 25bp rate cut down to 1.00%.  The central bank said it cut to support employment growth and to provide greater confidence on inflation, but we think this was another display of central banks being forced to cut when they don’t want to.  The RBA said the outlook for the global economy remains reasonable; they said house prices were stabilizing in Sydney and Melbourne, but more importantly they signaled that “the Board will continue to monitor developments in the labor market closely and adjust monetary policy IF NEEDED to support sustainable growth in the economy and the achievement of the inflation target over time”.  The new “if-needed” language is being interpreted by traders as “the RBA is done with rate cuts for now”, and with that we’ve seen AUDUSD regain all of its losses following the strong US Manufacturing ISM from yesterday.  We think a close above the 0.7000 level will repair yesterday’s bearish outside day on the charts and get traders focused on the upside once again.  The funds added marginally to their net short AUDUSD position during the week ending June 25, and we think this entrenched positioning (that is now starting to incur losses) will add fuel to the next market rally.

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USDJPY

Dollar/yen gapped higher with US equities and US yields following the G20 on the weekend, but the optimism has quickly faded as the “truce” lacked detail, the market really wasn’t expecting anything negative to come out of the meeting, US/China trade uncertainty still remains...plus we have actual negatives to chew on now following poor global June manufacturing PMIs and a renewed tariff threat on Europe so far this week.  The think USDJPY fills its Sunday chart gap (107.90-108.10) this week and we think global interest rates will remain under pressure here, which will put the Fed under an immense amount of pressure to actually begin a new rate cutting cycle later this month.  The net long USDJPY fund position at CME now stands at a mere 10k contracts as of June 25 as longs continued to liquidate for the 5th week in a row.  We think this flushing of long positions, however, will help USDJPY find buyers on any dips to the 107.50 area.

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Charts: TWS Workspace

About the Author

Erik Bregar - Director, Head of FX Strategy

Erik works with corporations and institutions to help them better navigate the currency markets. His desk provides fast, transparent, and low cost trade execution; up to the minute fundamental and technical market analysis; custom strategy development; and post-trade services -- all in an effort to add value to your firm’s bottom line. Erik has been trading currencies professionally and independently for more than 12 years. Prior to leading the trading desk at EBC, Erik was in charge of managing the foreign exchange risk for one of Canada’s largest independent broker-dealers.

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