It was an eventful day of data releases, especially from China and Japan, with the majority of the figures surprising on the upside. However, the euro and commodity currencies drifted lower throughout the session. The likely reason is that investors are nervous that the post-EU summit rally may have been overextended and/or they are unwilling to push higher without confirmation from European markets. Hence, we are waiting for the London open to see what reaction traders have to the summit now that they have had a couple of days to think about it. There is no doubt the details that emerged from the summit were more than the market was expecting, but there are still many questions that need to be answered, like: how long is it going to take to setup an effective single supervisory mechanism which would allow the ESM to recapitalise banks directly? Whatever the time frame there is genuine concern it will not come in time for Spain.
Elsewhere, official manufacturing PMI data out of China yesterday helped fuel an opening bounce in risk assets. Commodity currencies, the euro and equity markets in Asia where all pushed higher at the open by the 50.2 print from the Chinese official PMI data, as economists were expecting the number to print below 50 – the level which separates expansion and contraction. However, it appears to be only a matter of time before the official number shows pessimists outweighing optimists, unless Beijing moves to stimulate growth again. Furthermore, the unofficial manufacturing PMI figure released by HSBC is already well into contraction territory – printing at 48.2 today (prior 48.4). The difference between the two figures can somewhat be explained by the differing sentiment between the private and public sectors (with the latter being represented by the official figure and the former HSBC’s figure) but even once this is taken into account it is hard to believe manufactures are more optimistic than pessimistic. Nonetheless, investors are using the slowing PMI figures to call on more aggressively stimulus from Beijing.
In Japan, the mood amongst large manufactures is improving but still not well. The official Tankan headline figure printed at -1, much higher than the predicted -4, but in negative territory nonetheless. Overall, along with the increased assessments from the BOJ of the Japanese economy the data may take some of the pressure off the bank to enact more easing measures, but we doubt it is enough to stop the easing process entirely. Firstly, the domestic economy is still in dire shape and the yen is still fairly high, both of which can be helped, either directly or indirectly, by more easing. Secondly, the Japanese economy needs global demand to pick-up in order for the domestic recovery to progress, and there is no telling when that will happen.
NZDUSD proved to be fairly resistant to the slow unwinding of risk positions that occurred throughout the session. It appears investors are unwilling to push/hold the pair below the important psychological level of 0.8000, at least without more of a fundamental reason. AUDUSD and EURUSD both drifted lower throughout the session, but both managed to hold above their respective psychological support levels of 1.0200 and 1.2600. USDJPY initially looked like momentum may push it through 80.00, before the pair stalled and started to drift lower after the release of the Japanese data.
It was a similar story in other markets with some investors clearly content to sit on the sidelines and wait for confirmation from European markets. Hence, we will be closely watching peripheral bond yields at the open to determine the delayed reaction the EU summit.
NZDUSD – 10minutes