The new trading week has kicked off with a deluge of global PMI readings that has so far steered financial market price action, though the outcome has not been a resounding victory for either the bulls or bears. Confidence was high on Sunday night after HSBC’s flash PMI manufacturing reading for China moved back into expansionary territory with a print of 50.8, the first time above the boom/bust level this year. The positive reading on the health of businesses in China had currencies correlated with global growth seeing an uptick in demand, with AUDUSD ripping above the 0.94 handle and putting downward pressure on the DXY to start the week.
Mitigating some of the optimism around the prospects for global growth was that fact that European PMIs came in well short of expectations, as France had another tough month with both manufacturing and service sectors seeing a faster contraction than was witnessed the month prior. While Germany’s data was not as disappointing as what was seen from France (both manufacturing and service readings are well situated above the boom/bust level of 50), it was not enough to stop a slide for the overall Eurozone, with the composite reading showing a slowing in momentum with a drop from 53.5 to 52.8. The weak PMI numbers have put in jeopardy the EURs ability to establish itself above the 1.36 level against the USD, helping the DXY find somewhat of a foothold after the strength in the commodity-complex lead to softness in the big dollar.
Hydrocarbons are stable this morning, despite increased fighting in Iraq as the ISIL seize more territory around Iraq’s borders with Jordan and Syria.  Front month WTI is hovering just south of $107/barrel, while its international brethren, Brent, is finding equilibrium just shy of $115/barrel. The Loonie’s tear from Friday has managed to find renewed vigor, generating more demand after a strong Chinese PMI print increases the prospects for Canada’s export sector, and the soft PMIs from Europe have seen macro sales of EURCAD, which has led to further buying interest in the Loonie. While valuations of USDCAD appear stretched at these levels, Friday’s close below the 200-day moving average (the first time in over a year) and the associated follow-through today with more stops being run, doesn’t technically bode well for the pair.  That said, while Friday’s data challenges the Bank of Canada’s dovish outlook for inflation and perceived slack in the overall economy, higher energy prices and increased consumer demand are not the bastion of hope for the economy investors may be expecting. In order for the Canadian economy to begin firing on all cylinders, progress with business investment and stronger external demand will need to generated, transitioning away from such a heavy reliance on consumer debt.
The Week Ahead
In the wake of the global PMI numbers released earlier today, the last full week of the second quarter has a number of events that will attract attention from all corners of the globe.
After the Federal Reserve reassured financial markets that monetary policy conditions would be accommodating for quite some time, housing statistics set to drop early in the week will be a focal point for dollar traders and broader market participants. While the housing market in Q2 has so far been a disappointment, the figures for May are expected to be slightly more optimistic, with the release of Existing Home Sales later today forecast to see a bump to 4.73M from the 4.65M registered in April. Similarly, New Home sales look set to chalk up an annualized reading of 0.44M, better than the 0.43M that was posted in April. While neither release is expected to blow the doors off the hinges, a stabilization in the housing market would be dollar supportive, and help the DXY stem some of its bleeding after the dovish-commentary from Ms. Yellen last week. In addition, the PCE deflator is also set to be reported at the end of the week, and as it is the Fed’s preferred inflation measure, a flat reading at the 1.4% mark would corroborate the Fed’s assessment medium-term inflation expectations remain well anchored and poses no treat to the central bank’s pro-growth bias.
Pound traders will also have their hands full this week, with the upward break of 1.70 against the dollar looking sustainable given the relative stances of monetary policy between the two central banks. The key highlight for the week will be on Thursday when the Bank of England releases their Financial Stability Report and Governor Mark Carney holds a press conference to address the findings. Given the Financial Policy Committee of the BoE is expected to recommend macro-prudential measures in order to try and slow the overheating housing market down, Carney’s associated commentary will be parsed to see if he reiterates his hawkish stance from a few weeks ago when he warned markets were underpricing a rate hike. While a lot of the upward momentum in GBPUSD had been on the back of traders re-pricing interest rate expectations in the UK, a confirmation that steps are being taken to curb what could potentially be a housing bubble in London will likely defend a slippage below 1.70, though upside would generally be limited with another spike like the one witnessed after Carney’s Mansion House speech unlikely.
The Bank of Japan will eagerly be awaiting to see at what level of enthusiasm consumers returned to the stores with after the initial sticker shock of the tax hike in April. The May numbers for consumer spending are forecast to show a m/o/m rise of 2.5% after the drastic 13.3% drop witnessed in April, potentially giving the central bank a little confidence the economy could quickly recover after the jolt from the tax increase. Also on the docket for Thursday will be the release of the nationwide CPI figures in May, with more optimistic numbers forecast to show the core reading will come in with a y/o/y increase of 3.4%, better than the 3.2% experienced in April. As the case with the rest of the global economy, higher energy prices are expected to contribute to the upward movement in the CPI index, though once you back out the effect of the sales tax hike the core reading will approximate a +1.4% y/o/y movement, not too shabby considering the BoJ’s target is 2.0%. The further information on structural reforms from Shinzo Abe at the end of the week could be a slight let down if there is little announced past the corporate tax cut that is expected, though stronger readings on consumer spending and CPI could hamper USDJPY ability to make it north of 102 with any conviction.
Further reading:
EUR/USD June 23 – Back down to support on disappointing PMIs
Capping sterling strength
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