Firm August purchasing managers’ confidence indices from China to Europe have helped to maintain a positive bias to risk assets overnight although the Labor Day holiday limited trading activity. Attention centred on China’s service sector PMI, with a slight decline revealed to 53.9 in August. Elsewhere Australia’s central unsurprisingly kept monetary policy on hold. Later on the US ISM manufacturing survey is set to add to a run of negative US data surprises, with a decline expected in August, albeit with the index remaining in expansion territory. The employment component will be scrutinised for clues to Friday’s August non-farm payrolls report.
AUD faced today’s RBA policy meeting having bounced in the wake of an improvement in risk appetite, a jump in July building approvals and a rise in Chinese manufacturing confidence. Ahead of the RBA meeting July retail sales data disappointed versus expectations but weakness in AUD was reversed following the unchanged RBA decision and neutral statement. Indeed, the fact that the statement was not more dovish comes as a relief to AUD bulls. As a cut in the cash rate was not priced in nor expected by analysts the impact overall should be limited, however. While the door is kept open to further rate cuts the prospects of further easing are declining. AUD looks well supported, with the next resistance seen around 0.9070.
USD/JPY is finding some upside traction as risk appetite improves and prospects of the implementation of a sales tax in Japan gathers steam. “Abenomics” got a shot in the arm as consultative panels favoured moving ahead with the 5% sales tax in April. Additionally, the yield differential between the US and Japanese 10 year bonds remains above 200bps, sufficient in my view to spur capital outflows from Japan and a weaker JPY. The high level of speculative net JPY shorts may frustrate the move lower in the JPY although it’s worth noting that there is a long way to go before short positions hit their all time extreme levels. USD/JPY may find some near term resistance around the 2 August high at 99.95 but gains are likely to be sustained over coming weeks.
GBP is finding support on a number of fronts ahead of this week’s Bank of England policy meeting. Firstly on the data front, the trend has remained positive, with the August manufacturing PMI beating expectations (57.2 versus 55.0 consensus), with data in the form of PMI construction and Halifax house prices likely to be positive for GBP today too. News that the UK’s Vodafone is planning to sell its US mobile phone business to Verizon Communications will also act as a boost to GBP given the large cash element involved in the sale. I prefer to play long GBP versus EUR in the short term, especially given the outperformance of UK data and relative positioning in the currency pair.