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Chinese HSBC Flash PMI downright awful; weakest level since November 2011

Currencies
Chinese HSBC Flash PMI downright awful; weakest level since November 2011

By Mike Jones

NZD

You can’t fight the Fed. That’s been the main message in markets over the past 24 hours. USD selling in the wake of yesterday’s dovish Fed minutes continues to underpin the NZD/USD.

However, worries about a faltering Chinese economy have taken some of the gloss off. Having hit an overnight high of roughly 0.8185, the NZD/USD has eased back to trade around 0.8130 this morning.

Yesterday’s Chinese HSBC Flash PMI was downright awful. The headline index fell from 49.3 in July to 47.8 in August, its weakest level since November 2011.

In a sign weak eurozone activity is clearly taking a toll, the export orders sub index plummeted to 44.7, the lowest since the dark days of the financial crisis.

It seems the rebound in Chinese activity could be delayed yet further. Additional policy easing from the PBOC should be expected.

While the worrisome Chinese data was initially brushed off, it did crimp risk sentiment a little overnight, alongside a bit of (rare) hawkish Fed speak (see Majors).

As a consequence, the ‘growth-sensitive’ NZD/USD has eased off its overnight highs. However, the AUD/USD has been the real whipping boy, shedding almost a cent through the overnight session to trade around 1.0440.

Chatter, debate and rhetoric about the flagging fortunes of the Australian resources sector is now providing clear headwinds for the AUD.

This all looks overstated to us but it has been enough to propel the NZD/AUD through the top end of its recent 0.7640-0.7770 range. We now look for the cross to settle into a higher 0.7750-0.7900 range.

We’re expecting some payback in today’s NZ July merchandise trade figures, following June’s unusually strong results. This entails a 5% fall in export values from a year ago. Imports are expected to be flat (y/y) to produce a monthly trade deficit of NZ$82m (the market expects a NZ$41m deficit).

There will be more attention across the Tasman on RBA Governor Stevens’ testimony to the House (from 11:30am NZT).

Of particular interest will be any possible change in Steven’s view of the high AUD. The RBA has sounded relatively relaxed on this front lately.

All up, we continue to expect NZD/USD support around 0.8090 to hold, with a push through 0.8200 still on the cards over the next few sessions.

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Majors

The USD has continued to dribble lower over the past 24 hours, in the wake of yesterday’s dovish Fed minutes. This mostly reflects steady EUR buying. In contrast, the AUD has been a clear underperformer.

The advanced estimates of eurozone PMI manufacturing surveys proved a little better than expected, but we’re not be putting on our party hats just yet.

The French and German surveys rose by more than analysts’ expectations, but remain firmly in contractionary territory (at 46.2 and 45.1 respectively). To us, this looks very much like a ‘dead cat’ bounce. We remain concerned that September will see another decline.

Nonetheless, the data did provide a steadying influence on the EUR/USD which, helped along by the weak USD, continues to probe the topside. The currency made a fresh 1½ month high above 1.2550 overnight. We are targeting 1.2625 over the next few sessions.

Elsewhere, markets have tempered slightly their hopes for additional Fed easing following some hawkish comments from St Louis Fed President Bullard (a hawk, set to become a voter in 2013).

Bullard said yesterday’s minutes were “purposefully vague” and “a bit stale”. The idea QEIII is not quite locked and loaded received a frosty reception in stock markets (the S&P500 is currently down 0.7%).

Commodity prices have also given up some of the week’s gains and the commodity currencies NZD, CAD, and particularly AUD, have moved lower.

However, alongside our expectation for additional EUR gains, we suspect dips in the commodity currencies will be limited in the short-term as the USD remains heavy. Near-term AUD/USD support at 1.0410 is expected to hold.

Other News: Australian resources minister says the country’s mining boom “is over”. Overnight US data mostly undershot market expectations, keeping additional Fed easing in play. Jobless claims rose to 372k (365k expected) and new home sales recorded a smaller than expected increase in July (3.6% vs. 4.3% expected).

Event Calendar: 24 August: NZ trade balance; AU RBA’s Stevens testifies; JN BOJ’s Shirakawa speaks; UK GDP; US durable goods orders.

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