Dollar limits losses as global equities sell off

On Tuesday, a series of poor Chinese eco data pushed global markets further into risk-off modus. This weighed on the US dollar, too. However, the damage for the US currency was moderate given the huge losses on the equity markets. Markets apparently didn’t want to be too much dollar short ahead of the key US data to published this week which might decide on a Fed rate hike later this month. The US ISM of the manufacturing sector disappointed. The dollar drifted back to the intraday lows against the euro and the yen later in the session. EUR/USD closed the session at 1.1315 (from 1.1211 on Monday). USD/JPY ended the session at 119.37 (from 121.23).

Overnight, Asian equity markets trade again very volatile. Chinese and other regional indices opened (deeply) in the red, but the losses were reversed later in the session. An impressive ‘short-squeeze/rebound’ brought Japan, China and most other regional equity markets back into positive territory, although sentiment worsened again towards the end of the session. The ‘improved’ equity sentiment helped the dollar to reverse at least part of yesterday’s late session losses. In volatile trade, USD/JPY has rebounded back north of the 120. EUR/USD is again trading below the 1.13 (1.1280 at the moment of writing). This morning, Q2 growth in Australia was reported at 0.2% Q/Q (2.0 % Y/Y), 0.4% Y/Y was expected. Especially a negative contribution from net exports weighed on the overall growth performance. The Aussie dollar briefly dipped below the 0.70 mark against the USD dollar, hitting the lowest level in more than six years.

Today, the eco calendar is only moderately interesting. There are only second tier eco data on the calendar in Europe. In the US, the ADP labour market report is interesting. The consensus expects private sector net hiring at 200 000 (from 185 000) last month. We see slight downside risks. Usually, the market reaction to the ADP is moderate. However, in the current environment, a more pronounced reaction is possible (on both sides of the consensus). Yesterday, the reaction of short-term US yields and of the dollar to the market turmoil and to the poor ISM was rather limited. A new disappointing US eco data series might add to market nervousness on the Fed lift off and weigh a bit more on the dollar. However, most investors will keep their ammunition for the US payrolls expected later this week. After the close to the European markets, the Fed will publish its Beige Book preparing the 16/17 key policy meeting. Markets will look for clues on the assessment of the individual members on the US economy. As was the case of late, global market sentiment continues to play an important role for USD trading too. Yesterday’s risk-off trade was a moderately negative for the dollar. The jury is still out, but it looks that global equity sentiment might be a slightly more constructive today. In this context, the dollar might enter calmer waters, too. Yesterday’s price action suggests that the 1.1365 resistance is quite a solid reference going into Friday’s payrolls.

In a longer term perspective, EUR/USD broke (temporary?) beyond the 1.1534 resistance (post-ECB QE top) early last week. This level was an important reference for our LT term EUR/USD short bias, which was questioned from a technical point of view. However, the EUR/USD rally was in the first place driven by global market factors (risk-off sentiment) rather than fundamental economic US and EMU news. Despite this technical warning, we maintained the view that the economic and monetary context hasn’t changed in such a way that it calls for a big change in favour of the euro and against the dollar. That said, the risk-off logic can still pop up and trigger pockets of USD weakness. For now, we see 1.1017/1.1714 as the new trading range. Within this range, a cautious sell-on-upticks approach is favoured going into the Fed September policy meeting.

Sterling struggles after poor manufacturing PMI

Yesterday, sterling continued to fight an uphill battle. EUR/GBP trended higher in line with the EUR/USD as global risk-off sentiment supported the single currency. However, the news flew from the UK weighed on the sterling, too. The UK PMI of the manufacturing sector dropped unexpectedly to 51.5, while a slight rebound was expected. This PMI report added to the sterling negative sentiment. The UK currency lost further ground against a weak dollar. EUR/GBP closed the session at 0.7393 (from 0.7306). Cable slipped below the 1.5330 support. The pair closed the session at 1.5304 (from 1.5345).

Today, the UK construction PMI will be published. A further rebound from 57.1 to 52.00 is expected. The market reaction to the report is often moderate and temporary in nature. Over the previous days, sterling wasn’t in really good shape due to overall negative sentiment on risk. Yesterday’s poor manufacturing PMI only added to the sterling negative sentiment. In a daily perspective, sterling might get some relief as sentiment on risk turns less negative this morning. Despite recent sterling weakness, we maintain the LT view that the topside in EUR/GBP is rather well protected, with important resistance in the 0.7483/0.75 area. Interest rate differentials between the euro and sterling are still substantially in favour of the UK currency. A cautious sell-on-upticks approach might be considered.