Aussie Cracks as Stevens Whacks

Market Drivers July 03, 2014
Stevens kicks Aussie while down pair falls below 9400
UK PMI Services misses
Nikkei -0.14% Europe 0.40%
Oil $104/bbl
Gold $1322/oz.

Europe and Asia:
AUD Retail Sales -0.5% vs. 0.0%
CNY Services PMI 53.1 vs. 50.7
GBP UK PMI Services 57.7 vs. 58.3
EUR Retail Sales 0.0% vs. 0.2%%

North America:
USD NFP 8:30 AM
EUR ECB Presser 8:30 AM
USD ISM Services 10:00

The Aussie tumbled hard in Asian trade today hitting a low of 9361 after RBA Governor Glenn Stevens reiterated the point that the unit was too high by "more than a few cents". Speaking in front of the Australasian Meeting of the International Econometric Society in Hobart, Mr. Stevens noted, "Lest there be any uncertainty about this, let me be clear, again, that the exchange rate remains high by historical standards. When judged against current and likely future trends in the terms of trade, and Australia's still high costs of production relative to those elsewhere in the world, most measurements would say it is overvalued, and not by just a few cents."

We noted yesterday that RBA is clearly concerned with the impact of the high exchange rate of the AUD/USD on Australia's term of trade which are already showing serious signs of deterioration as the Trade deficit last month widened by ten times more than expected. Today's speech therefore was not surprising as Mr. Stevens tried to rein in the rally in Aussie. It appears that the RBA has set 95 cents as its Maginot line and likely to become much more aggressive in its rhetoric is the pair moves back up through that barrier.

Meanwhile in UK the PMI Services report missed its mark - the only one of the three PMIs to do so this week - printing at 57.7 versus 58.3. Services makes up 75% of the UK economy, so naturally this was the most important PMI report of all three, yet the reaction to the news was generally muted. Cable slipped only 20 points in the aftermath of the news as the headline data masked relatively robust readings underneath.

The new orders component surged to a six month high while the employment subcomponent rose to a whopping 58.2 versus 55.9 the month prior. Labor markets are indeed tightening in UK as respondents saw higher costs attributed to salaries and wage costs. The key issue for cable traders is whether the strong economic activity in UK will translate into meaningful wage increases. If that dynamic takes place over the next several months then the BOE will have no choice but to hike rates this year.

Sterling in the meantime remained quiet consolidating its losses underneath the 1.7150 level as currency markets shifted their focus to the US NFP due at 12:30 GMT. Yesterday's ADP report which showed a much larger than expected gain of 281K jobs vs. 207K forecast has injected dollar longs with a dose of optimism as US rates rallied above the 2.60% level lifting the buck throughout yesterday's North American trade.
Although ADP has been notoriously inaccurate as a predictor of NFPs, if today's NFP data prints anywhere above 200K and more importantly if there is any upward progress on average weekly earnings, the greenback is likely to catch a bid tone for the second day in a row and USD/JPY will likely surmount the 102.00 barrier with conviction.

Finally, on what promises to be a very busy North American session, the ECB will hold its monthly presser. Although the markets do not expect any further policy moves from Mr. Draghi and company, the latest series of data points from the region suggests lackluster growth at best and that should lead the ECB chief to reiterate the fact that monetary policy is likely to remain accommodative for the foreseeable future. Therefore any combination of strong NFP results and dovish rhetoric from ECB could push EUR/USD back below 1.3600 as the day proceeds.