Chinese equities in monster slide - Aussie tries to look the other way - but for how long? RBA up in Asia's Tuesday session tonight. Last week's calm may have set up a storm for the week


MAJOR HEADLINES – PREVIOUS SESSION

  • Norway Jul. Retail Sales rose 2.4% MoM vs. 1.5% expected and -2.2% in Jun.
  • Canada Jun. GDP out at +0.1% vs. +0.2% expected
  • US Aug. Chicago PMI out at 50.0 vs. 48 expected and 43.4 in Jul.

THEMES TO WATCH – UPCOMING SESSION

  • US Aug. NAPM Milwaukee (1400)
  • US Aug. Dallas Fed Manufacturing Activity (1430)
  • Australia Aug. AiG Performance of Manufacturing Index (2330)
  • China Aug. PMI Manufacturing (0100)
  • Australia Q2 Current Account Balance (0130)
  • Australia Jul. Building Approvals (0130)
  • China Aug. CLSO Manufacturing PMI (0230)
  • Australia RBA Cash Target (0430)

Market Comments:

The overnight Asian session was one of the more interesting in recent memory, with first the landslide opposition Democrat victory in Japan pushing the JPY much stronger versus the market. By later in the session, much of the JPY gains were reversed as the market perhaps recognizes that significant trading decisions are a bit hasty with so much uncertainty surrounding the future trajectory of policy from the new power-holders. The stronger JPY argument for the opposition Democrats - that they are less interested in wasting money on keeping the JPY weak, is still largely dependent on the trajectory of rate differentials - besides, the BoJ. The weaker JPY argument is that the Democrats could launch huge new spending plans to boost incomes and stimulate spending - a frightening position in the world's most indebted government. Japanese short rates were largely unchanged to close the session after a spike higher intraday. US Ten-year notes are still probably the best coincident indicator on the JPY at the moment.

At the same time, the bottom completely fell out of the Chinese equity market in Asia, as the Shanghai composite closed some 6.7% lower in Monday's session to a new low since May. If the Chinese authorities are trying to choke off an asset bubble, they certainly appear to be succeeding. This story bears the most scrutiny at the moment.

Today also marked a bank holiday in the UK and is the last trading day of the month - the former normally constricting liquidity, and the latter usually generating large, one-off flows. This combination may not sit well with those trying to draw conclusions from the day's action . Many have talked up the potential for USD negative month-end fixings, but we wonder if events elsewhere could be overshadowing the normal month-end flows. As of this writing, there is no evidence of USD negative flows, but the NY session is only just getting underway as of this writing.

The amazing Aussie is performing remarkably well considering the wealth of negative factors surrounding it - is this a sign of admirable resilience or the market's cluelessness? Perhaps some are holding out for the RBA meeting tonight in hopes of another round of hawkish musings from RBA governor Stevens. But if sentiment is crumbling in China and other equity markets around the world tonight in Asia's Tuesday session, it would be surprising to see the Aussie bulled up to new highs even on the most hawkish of RBA rhetoric. Rate expectations are already pushing up above 175 bps for 12-months out. Can Mr. Stevens really raise the bar? AUD longs should be very nervous here...

While we're down under, we wonder how much longer the kiwi can defy gravity if a reasonable consolidation in risk takes place this week. The New Zealand authorities are distressed at the currency's strength and we have to imagine that stronger verbal rhetoric is in the making soon. If risk aversion materializes again, it will take care of Mr. Bollard's worries, if not, the RBNZ and the government are going to have to get tougher on the traders bidding up their currency.

Here's a rundown of the biggest economic calendar highlights in a busy week ahead:

Tuesday:

  • RBA rate decision - market has been persistently ratcheting up it rate expectations for world central banks - and the RBA has been at the vanguard. Is perfection already priced in - or can the speculative market continue to extend its long Aussie position?
  • Germany Aug. Unemployment - still has a long way to go to the upside if it continues to track the US employment situation with a huge lag like it normally does due to the inflexibility in German labor markets. The real headline rate is already far higher than the 8.4% expected
  • US Aug. ISM Manufacturing - likely fairly strong and is expected to push over the 50 level for the first time since January of 2008.While the situation has improved, remember that durable goods orders are still down some -20% year-on-year, meaning that things at this point have only gotten much better than the horrors of the fall/winter of '08-09. Today's 50 and 2007's 50 in the ISM is a comparison of apples and oranges.
  • US Aug. Vehicle Sales - this will get a lot of press due to the Cash for Clunkers giveaway - but look for this month's numbers to cannibalize on the numbers for the rest of the year

Wednesday

  • Australia Q2 GDP - backward, not forward looking - but still interesting.
  • EuroZone Q2 GDP - expected to show a small contraction and -4.7% YoY
  • US Aug. ADP employment change - a smaller contraction in employment expected this time around - but weekly claims have shown no improvement off July levels
  • US Q2 Nonfarm Productivity and Unit Labor Costs - the effects of firing lots of employees and squeezing more out of the remaining ones is painfully clear in these numbers.
  • US FOMC Meeting Minutes

Thursday

  • Australia Aug. Performance of Services Index
  • Sweden Riksbank - if markets are in a sour mood this week, we might look for a consolidation higher in EURSEK and USDSEK.
  • UK Aug. Services PMI - expected well above 50 again - are we nearing the peak of the middle of the W in the UK economy?
  • EuroZone ECB Interest Rates - the ECB has been maintaining a very consistently dovish tone - no change expected and the outlook is likely to be very cautious
  • US Weekly Initial Jobless Claims - ever important as the market looks for this lagging indicator to begin improving further after flattening out in recent weeks
  • US ISM Aug. Non-manufacturing - more important than the . We have to imagine that this survey will peak soon if we are to believe in the double-dip scenario for this fall.
Friday
  • Canada Aug. Unemployment Rate - Canadian unemployment is ramping rapidly higher and the central bank is frowning at the strong CAD of late.
  • US Unemployment Rate and Change in Nonfarm Payrolls - let the monthly circus began. It is very doubtful that we see a fall in the unemployment rate again with initial jobless claims consistently running well above -500k through August.
  • Canada Aug. Ivey PMI - this number seems suspiciously strong of late - it's been an erratic mover in the past.

After weeks of prognosticating that we could finally see a break of the ranges, we still insist on crying "Wolf!" for another week after last week's very uncertain close, the watershed Japanese election, the nervousness in China, and the heavy economic data flow this week. A close either above 1.4400 or below 1.4000 in EURUSD could finally help provide a directional indicator for that supermajor for subsequent weeks.