Earlier in the Day:
Economic data through the Asian session this morning was limited to China’s January service sector PMI numbers. Following last week’s disappointing manufacturing PMI figures, the markets were hoping for some positive data, as the Chinese government continues to address the nation’s pollution problem caused largely by the manufacturing sector.
The January Caixin services PMI rose from 53.9 to 54.7, taking the composite output PMI to a 7-year high 53.7, suggesting that China’s economy is seeing accelerated growth going into the New Year. January’s jump in service sector activity was the most marked since May 2012, driven by stronger client demand, with new orders accelerating to a 32-month record and rising headcounts, with the services sector seeing payrolls rising for a 17th consecutive month and the rate of job creation hitting a 5-month high.
While the numbers were certainly a positive, the markets showed little interest however, as the Asian equity markets continued to tailspin in response to rising government bond yields and Friday’s U.S market sell-off that saw the Dow cough up 666 points, an ominous number in itself for the more superstitious investor.
At the time of writing, the Japanese Yen was up 0.18% to ¥109.97 against the Dollar, with the risk off sentiment driven demand for the Yen through the session, while the Aussie Dollar was up just 0.03% to $0.7933, recovering from an intraday low $0.7891 ahead of tomorrow’s RBA interest rate decision.
For the Kiwi Dollar, it was also relatively flat at the time of writing, down just 0.04% to $0.7297, with the markets looking ahead to 4th quarter employment numbers ahead of Thursday’s RBNZ interest rate decision.
With both the Aussie Dollar and the Kiwi Dollar seeing sizeable gains at the turn of the year, expectations are for both central banks to be on the dovish side, looking to pin back their respective currencies, with forecasts being for the Aussie Dollar to move back to sub-$0.75 levels and for the Kiwi Dollar to ease back to sub-$0.70 levels in the coming months.
The more hawkish FED and market sentiment towards FED monetary policy will certainly provide some pressure, but with the global economic outlook positive, there’s also plenty of support for commodity currencies, which is expected to adversely impact trade terms for both economies.
In the equity markets, the uptick in the Yen saw the Nikkei down 2.41% at the time of writing, with the ASX200 and Hang Seng down 1.80% and 1.46% respectively, while the CSI300 was down 0.73%, finding support from the upbeat service sector and composite PMI numbers released this morning.
The Day Ahead:
Economic data out of the Eurozone this morning includes January’s finalized service sector PMI numbers, together with the Eurozone’s retail sales figures. The EUR bulls will be looking for positive retail sales figures to support a more optimistic view on inflation, but following disappointing numbers out of France and Germany last week, forecasts are EUR negative. The service sector PMIs could provide some support however, with Spain and Italy service sector output expected to rise at the turn of the year.
At the time of writing, the EUR was down 0.03% to $1.2459, with the EUR likely to find support from Merkel’s progress on forming the Grand Coalition, where talks are scheduled to resume this morning.
For the Pound, economic data includes January’s service sector PMI numbers, which will be of particular importance as the markets look to get a sense of where the economy is heading at the start of the year. While the Pound was able to stomach softer manufacturing and construction PMI numbers, any weak service sector data will be a negative for the Pound this morning. Forecasts are sterling positive, though how much upside there is for the Pound will be Brexit dependent as Theresa May’s political dramas worsen, with the Tory Party now divided on Brexit, trade and customs.
At the time of writing, the Pound was 0.01% to $1.412, with direction through the day in the hands of Theresa May and the Tories.
Across the Pond, the Dollar was on the back foot through the early part of the day, down 0.06% to 89.141, with economic data out of the U.S this afternoon including the market’s preferred ISM Non-manufacturing PMI figures for January and finalized Markit survey service sector PMI numbers.
Forecasts are Dollar positive, though the Dollar may struggle to see any major upside with the possibility of another government shutdown looming, as the 8th February deadline approaches.
Progress on immigration laws for the so called ‘Dreamers’ will be the key driver for the Dollar, though there will be influence from the stats, particularly if there is further evidence of an uptick in inflation in today’s service sector PMI numbers.
In the futures market, the Dow mini is down 119 points, recovering from steeper losses earlier in the day, with the S&P500 and NASDAQ minis down 6.5 points and 9.25 points, pressured by a possible 4th rate hike this year, driving 10-year Treasury yields ever closer to 3%.