This market is in a very complacent mood ahead of the ECB meeting Thursday, and complacency means further EURUSD upside until volatility or caution returns. US futures market shows JPY short positioning at a new 5-year extreme.
World manufacturing PMI day todayChina kicked off the manufacturing PMI releases for the month of November over the weekend, as the official PMI came in a hair below expectations but still marginally better than the October level and suggesting no real change in activity. The more small- and private enterprise oriented HSBC survey was a hair better than expectations and the first reading above 50 in over a year. Meanwhile, Australia’s survey was bogged down well below 50 as it has been for most of this year, not that manufacturing is the chief concern there.
The European manufacturing survey numbers remain rather dismal, with Spain’s positive surprise offset somewhat by Italy’s failure to improve and France’s failure to improve as much as expected. The Swedish survey was particularly bad and remains pegged near 43 for the second month running. EURSEK is pushing at the 200-day moving average again on this development.
Looking aheadIt’s a busy week of US data ahead, but volatilities are collapsing to multi-year lows outside of the JPY crosses and there doesn’t seem to be any fresh bout of concern in markets here despite fresh signs that US politicians will continue to play chicken with fiscal cliff issues for now. The US futures market shows the largest net short JPY position (vs. the USD) in over 5 years due to the prospect of a Shinzo Abe government on its way. Yes, outright JPY shorts were even larger back in 2006 and 2007 at times, but those extremes in positioning usually came just ahead of a massive bouts of appreciation in the JPY and I would continue to maintain that the JPY progress weaker will be fraught with plenty of back-filling and two-way volatility. The next big sentiment test for JPY traders comes with the December 16th election outcome. Some of the extent of the move in the JPY is likely due to the frustration with the lack of inspiring trends elsewhere and the feeling that at least there is a “story” to follow with the JPY.
It might take a large standard deviation surprise in the US data this week to trigger any kind of reaction in this environment in the USD, either from the non-manufacturing survey on Wednesday or in the payroll/unemployment numbers on Friday. Next week’s FOMC meeting should garner more attention than any data release this week barring large surprises. Elsewhere, the other potential surprise this week would be a rate cut from the ECB on Thursday in support of the European economy after the last round of weak data. Mr. Draghi and company will see no need to anything dramatic after the huge further reduction of EU tail risks of late.
Low volatility generally equates with high complacency and a weak USD, so as long as the market continues to don its rose-tinted glasses every morning, it’s hard to see what it is going to shake this market out of its complacency in the nearest term, though the complacency doesn’t sit well with me as the fundamental picture is not improving as much as the markets want us to believe. The other thing that is out of place is the gold market’s move lower, which suggests that the QE theme is a weaker than the current price of the USD and JPY suggests. Which market is “right”?
Watch out for the RBA Cash Target announcement tonight, as the RBA is expected to cut the target 25 bps to 3.00%. Further market complacency could see Aussie pairs finding quick support on this as it is mostly priced in with the recent move lower in forward yield expectations, while there is more downside potential for Aussie pairs if the general market mood sours.
Stay careful out there.
Economic Data Highlights
- China Nov. Manufacturing PMI out at 50.6 vs. 50.8 expected and 50.2 in Oct.
- Australia Nov. AiG Performance of Manufacturing Index out at 43.6 vs. 45.2 in Oct.
- UK Nov. Hometrack Housing Survey out at -0.1% MoM and -0.4% YoY vs. -0.3% YoY in Oct.
- Australia Oct. Retail Sales out at 0.0% MoM vs. +0.4% expected
- China Nov. Non-manufacturing PMI out at 55.6 vs. 55.5 in Oct.
- China Nov. HSBC Manufacturing out at 50.5 vs. 50.4 expected and 49.5 in Oct.
- Sweden Nov. Swedbank PMI out at 43.2 vs. 44.0 expected and 43.1 in Oct.
- Poland Nov. Manufacturing PMI out at 48.2 vs. 47.4 in Oct.
- Norway Nov. PMI out at 50.1 vs. 48.8 expected and 49.0 in Oct.
- Switzerland Oct. Retail Sales out at +2.7% YoY vs. +3.8% expected and +5.0% in Sep.
- Spain Nov. Manufacturing PMI out at 45.3 vs. 43.9 expected and 43.5 in Oct.
- Switzerland Nov. Manufacturing PMI out at 48.5 vs. 47.0 expected and 46.1 in Oct.
- Italy Nov. Manufacturing PMI out at 45.1 vs. 46.0 expected and 45.5 in Oct.
- France Nov. Manufacturing PMI out at 44.5 vs. 44.7 expected and 43.7 in Oct.
- Germany Nov. Final Manufacturing PMI out at 46.8 as originally estimated and vs. 46.0 in Oct.
Economic Data Highlights (all times GMT)
- US Nov. ISM Manufacturing (1500)
- US Oct. Construction Spending (1500)
- US Fed’s Rosengren to Speak (1715)
- US Fed’s Bullard to Speak (1840)
- US Nov. Vehicle Sales (2200)
- UK Nov. CRC Sales, like-for-like (0001)
- Australia Oct. Building Approvals (0030)
- Australia Q3 Current Account Balance (0030)
- Australia RBA Cash Target Announcement (0330)