Dollar, Yen Fall as Risky Assets Rebound, US ISM Looms Ahead

Key Overnight Developments

• Australian Dollar Soars as Q2 GDP, Chinese PMI Top Expectations
• US Dollar, Japanese Yen Sold as Stocks Advance in Asian Trade

Critical Levels

The Euro and the British Pound pushed higher in overnight trade, rising 0.3 and 0.4 percent respectively against the US Dollar, after encouraging Australian GDP and Chinese PMI figures buoyed risk appetite and sent stocks higher in Asian trade (see below), boosting risk-correlated currencies. The MSCI Asia Pacific regional equity benchmark index added 0.8 percent. We remain short EURUSD and flat GBPUSD.

Asia Session Highlights

The Australian Dollar surged in overnight trade, leading a broad-based advance in risk-correlated currencies against the safety-linked US Dollar and Japanese Yen, after second-quarter Gross Domestic Product figures showed the economy added 1.2 percent in the three months through June. The outcome topped economists’ forecasts calling for a 0.9 percent increase and marked the largest increase in three years.

Risky assets were already on their way higher ahead of the GDP report after Chinese Manufacturing PMI figures showed growth in the East Asian giant’s industrial sector accelerated for the first time in three months in August. The outcome was interpreted as supportive for Australia via export demand considering China is the world’s largest consumer of the antipodean nation’s mining goods as well as for overall risk appetite given China’s central role as a driver of global growth in the aftermath of the 2008 Great Recession.

Looking ahead however, overnight gains don’t seem to have much scope for longer-term follow-through. Indeed, the Chinese PMI gauge remains in a downtrend in place since the metric topped out in December 2009, with today’s result coming nowhere near violating that trajectory. Furthermore, the Australian GDP result has done nothing for RBA rate hike expectations, with a Credit Suisse index tracking priced-in policy changes still pointing to toward a static posture for the year ahead, hinting investors are unconvinced that robust performance will continue.

Meanwhile, signs of a broad-based slowdown in global growth abound, with JPMorgan’s Global PMI down to a 5-month low in July while the Baltic Dry Index – a gauge of international trade activity – slid to the lowest since April 2009 over the same period. On balance, this hints that the path of least resistance over the longer term points toward risk aversion, an outcome that bodes ill for the Aussie and risky assets as a whole. We remain short AUDUSD.

Euro Session: What to Expect

The economic calendar is relatively tame in European hours. Switzerland’s SVME-Purchasing Managers Index(PMI) is expected to show manufacturing activity slowed in August. The analogous UK Manufacturing PMI result is set to show the industrial sector growth slowed for the third month after topping in May while the final revision of Euro Zone Manufacturing PMI is expected to confirm the lowest reading in six months.

On balance, risk sentiment is likely to remain in focus, and a look at stock index futures suggests that risk appetite is likely to remain supported in the near term despite continued signs of slowing economic activity emanating from the data docket. Indeed, European index futures are well into positive territory ahead of the opening bell while those tracking the S&P 500 are up 0.7 percent, pointing toward continued gains for most major currencies at the expense of the safety-linked US Dollar and Japanese Yen. The longevity of the risk rebound is suspect however, with the US ISM gauge of manufacturing activity expected to slide to the lowest in a year, an outcome that surely bodes ill for investor confidence as markets continue looking to America’s economy as the bellwether for global growth at large.

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