Preliminary August PMI show many are coping with US shock

Overview: The broad consolidative tone in the foreign exchange market is continuing today even though nearly all the preliminary August PMI readings showed improvement, including the first time since Russia's invasion of Ukraine that the eurozone's manufacturing PMI is above the 50 boom/bust level. Still, outside of the Norwegian krone, lifted by a stronger-than-expected Q2 GDP (mainland 0.6% vs 0.3% expectations, and Q1 growth was revised to 1.2% from 1.0%, quarter-over-quarter), the G10 currencies are in a narrow range (+/- 0.15%). Emerging market currencies are mostly lower. 

Equities have not responded as well to the favorable PMI reports. Japan and Hong Kong equities fell, while Taiwan and Australia led the region with more than 1% gains. Chinese stocks were mixed, but the Shanghai Composite extended its dramatic rally. The Stoxx 600 three-day rally in Europe is under threat, and US index futures are nursing small losses. European 10-year yields are around 2 bp higher, but the 10-year Gilt yield is up nearly four basis points. The 10-year US Treasury yield is up about 1.5 bp to above 4.30%. Weak equities and a solid reception to the 20-year bond auction yesterday saw the 10-year yield slip to almost 4.27% yesterday, the low for the week. Gold initially extended yesterday's nearly 1% rally but encountered selling pressure as it rose above $3350. It is trading near $3340 now, after settling last week slightly above $3336. October WTI is bid at a seven-day high near $63.40. Resistance is seen in the $64.20-35 area. 

USD: The Dollar Index made a marginally new six-day high yesterday near 98.45, where the 20-day moving average was found. It was sold after President Trump called for the resignation of Federal Reserve Governor Cook over some claims of that she received mortgages in two different states, claiming each would be her primary residence. There has been no investigation. DXY steadied near 98.10. It is trading within yesterday's range today. Of the slew of US data today, two reports stand out. The first is weekly jobless claims. Recall that last week, the four-week moving average rose for the first time since mid-June. Net-net continuing claims are little changed from late May levels. The second is the preliminary PMI. The manufacturing PMI held above the 50 boom/bust level in H1 25 after being below 50 throughout H2 24. It slipped to 49.8 in July and may have slipped more in August. The composite PMI rose to 55.1 in July, a new high for the year. If we are right and the economy is losing momentum, the composite PMI is likely softening this month.

Euro: On the back of Trump's thinly veiled attempt to secure another nomination to the Federal Reserve, the euro was bid to within 1/100 of a cent of the $1.1675 level, where slightly more than 1.1 bln euro in options expired. The euro had initially seen some follow-through selling after falling Monday and Tuesday. It found support near the 20-day moving average, slightly below $1.1625. That has held today, and the euro recovered to almost $1.1665. The preliminary August composite PMI rose to a new high for the year 51.1 (from 50.9). Of note. the manufacturing PMI rose every month this year and is now above 50 (50.5) for the first time since Russia's invasion of Ukraine. Separately, both Germany and France's composite PMI firmed, but the former remained above 50 and the latter, below. 

CNY: Yesterday, the dollar traded on both sides of Tuesday's range and settled below Tuesday's low (~CNH7.1820). The "outside down day" is often seen to reflect bearish psychology. Follow-through selling pushed the dollar to almost CNH7.1715 today. However, the currency is actively managed and remains the trading range that has dominated since August 2 of about CNH7.1680-CNH7.1980. After setting the dollar's reference rate higher on Tuesday and Wednesday, the PBOC set it at CNY7.1287 (vs. CNY7.1384 yesterday), a new low since last November. 

JPY: After briefly poking above JPY148 on Tuesday, the dollar was sold to almost JPY147 yesterday. The dollar was broadly weaker following after President Trump called for the resignation of a Federal Reserve governor. If Chair Powell does not resign after his term as governor when his term as chair ends, there are no other scheduled seats for Trump to fill until 2028. Weaker US equities and soft US yields may have helped the yen. It is trading quietly today in about a JPY147.25-JPY147.70 range. The foreign exchange market typically does not respond much to Japan's PMI. The composite finished last year at 50.5 and was at 48.9 at the end of Q1 25. though we now know the economy expanded by 0.6% at an annualized. It rose to 51.5 at the end of Q2, the highest since February, and the initial estimate of growth was 1.0% annualized. The preliminary estimate is 51.9 in August from 51.6 in July. Outside of June, when the manufacturing PMI rose above 50 (50.1), it has been consistently below there since the end of H124. It rose to 49.9 in August (from 48.9 in July).

GBP: Sterling stuttered yesterday, after the higher-than-expected July CPI. It recorded the session high after the data near $1.3510. Yet through most of the European and early North American session, sterling trended lower. It fell slightly below $1.3450 in late North American dealings, a new low for the session. Today, sterling initially extended its losses for a fourth consecutive session, falling to $1.3435 to approach the next area of support near $1.3415-20. It recovered to almost $1.3485 in Europe, helped by a jump in the preliminary composite PMI. It rose to a new high for the year (53.0 from 51.5). Still, the PMI fell for the first time in six months (47.3 from 48.0) and has not been above the 50-threshold since last September. The services PMI jumped to 53.6 (from 51.8), the best since last August. 

CAD: The greenback reached CAD1.3885 today, its highest level in nearly three months. A foray above CAD1.3900 may find little resistance ahead of CAD1.40. Initial support is seen near yesterday's low (~CAD1.3855). What has shifted is the risk of another Bank of Canada rate cut this year. In late July, the swaps market was 50-50, but now the cut is nearly fully discounted. The implied rate in 12 months has fallen by more than 20 bp since the middle of July. Canada reports July industrial product prices and raw materials price index, but they tend not to have much market impact.

AUD: The Australian dollar fell for the third consecutive session yesterday and is threatening to extend the streak today. It peaked last week near $0.6570 before reversing lower. It fell to $0.6415 today, a marginal new low for the month. The daily momentum indicators warn of more downside risk. A break of $0.6400 could spur a move toward $0.6355-85. The composite PMI rose to 54.9 (from 53.8), a new cyclical high. It was at 50.2 at the end of last year. Australia is one of the few G10 countries that the manufacturing PMI remained above 50 this year. The preliminary August estimate is 52.9 (51.3 in July). The services PMI stands at 55.1 (54.1 in July).

MXN: The peso continues to trade quietly. The US dollar remains in the range set on Monday: ~MXN18.7120-MXN18.8675. Yesterday, the dollar did not trade above MXN18.85 or below MXN18.74. So far today, it is in about an MXN18.7670-MXN18.8120 range. Mexico reports June retail sales today, and after a dramatic 1.8% jump in June, a modest pullback should not surprise. The minutes from the recent central bank meeting will be released. We know that the overnight target rate was cut by 25 bp (to 7.75%), though Deputy Governor Heath dissent in favor of leaving policy unchanged. The central bank signaled scope for additional cuts. The swaps market is discounting a terminal rate near 7.25%. Tomorrow, in addition to another look at Q2 GDP (0.7% quarter-over-quarter), Mexico reports CPI for the first half of August, and a small acceleration in the year-over-year pace is expected.