USD stronger on Lockharts comments

Market Brief

Choppy trading continues in the FX markets as liquidity conditions remain weak. USD price action remains broadly supportive following Fed Lockharts hawkish comments overnight. Atlanta Fed President Dennis Lockhart said that the US economy was ready for the first rate hike in September and it would take "significant deterioration" of economic data to change his mind. According to the Wall Street Journal Lockhart stated that “there is a high bar right now to not acting, speaking for myself." US rates and dollar shifted higher on the comments. We suspect that the USD will continue to pick up demand heading into this week’s payrolls numbers. Today, US 10 year yields rose further by 2bp to 2.237%. EURUSD continued to slide hitting 1.0848 in early Asia (two-day decline -1.30%). AUDUSD took the biggest fall in the G10 falling to 0.7343 from 0.7384. USDJPY was stable bouncing around 124.27 to 124.45 as movement in the US short end was limited. Emerging Asia currencies were broadly weaker as USDCNY rose to 6.2097. Asia regional equity indices were mixed as the Nikkei rose 0.56% , the Hang Seng up 0.25% however, Shanghai and ASX fell -0.95% and -0.42% respectively. Commodities were stable with oil slightly higher as US crude production fell.

The IMF released its initial findings for the upcoming review of its SDR basket. The report highlighted the progress of internationalization of the yuan while key financial performance were mixed. However, the report stated that there was still considerable work in analyzing the data before a formal decision could be made SDR basket structure (ie on Chinese currency reserve status). IMF staff members proposed that a delay of nine-month for any change to make the transition to a new basket smoother. Elsewhere China’s Caixin services PMI provided some well needed positive news rising to 53.8 in July, following a 51.8 in June. Yet China's composite PMI fell marginally to 50.2 in July from 50.6.

From Australia, AIG performance of services index rose to the highest level since 2014 to 54.1 in July, from 51.2 in June. New Zealand’s unemployment rate inched upwards to 5.9% in 2Q (in line with expectations) from a rate of 5.8% in 1Q. Finally, Japan’s services PMI expanding at a slower rate at 51.2 in July, against a prior read of 51.8 in June. While, July’s composite PMI unchanged at 51.5.

In the European session, markets expect Euro Area, German, Italian, Spanish and French composite PMIs. Euro-area retails sales are expected to decline to -0.2% m/m in June. In the UK, markets expect house prices to accelerate to 0.4% m/m from -0.2% m/m. UK services PMI is anticipated to slow marginally to 58 from 58.5. GBP trading should be subdued ahead of tomorrows event filled schedule. We remain bullish on the GBP against CHF, JPY and Euro on policy divergence (which should get substantial clarity after tomorrow). In Switzerland, inflation is expected to fall from 0.1% to -0.4%, yet y/y should be flat at 1.0%. We remain significantly bearish on the CHF prospects and suspect that USDCHF is the “purest” play for monetary policy divergence theme. USDCHF made short work of resistance at 0.9725, suggesting a bullish extension to 0.9863.

In the US session markets will get two important pieces to the Fed timing puzzle. ADP employment is anticipate to increase by 215k, below June 237k rise. US ISM non-manufacturing is projected to expand to 56.2 from 56.0.