The new quarter has kicked off where the last one ended, with a stronger USD across the board, fresh highs in US equities, and the VIX index hovering around historical lows. UST yields have peeled off after earlier reaching a fresh 2½-month high.
On the economic front we’ve seen a string of positive business confidence data, with multi-year highs being achieved across the world. As we reported yesterday, the official China PMIs released on Saturday rose with the manufacturing index at a 5-year high. To that we can add Japan’s Tankan survey, showing confidence amongst large manufacturers at their highest level in over a decade and final euro-area PMI data at a 6½-year high. The US ISM manufacturing index was meant to be softer as a result of the hurricanes but instead rose to a 13-year high, with strong new orders and employment sub components. The UK is the only region dragging the chain, with its manufacturing PMI slipping in August, despite the weaker GBP over the past year.
Amidst all that data it is difficult to detect much market reaction. For currencies, it appears that political developments have dominated. The worst performing currency is GBP, which has shown a steady fall of nearly 1% to 1.3275, as the annual conference of the Conservative Party begins. There have been calls for PM May to sack foreign secretary Boris Johnson, who has been outspoken about her Brexit strategy and undermined her authority. GBP was well down even before the softer PMI data were released.
Sunday’s illegal independence referendum in the Spanish region of Catalonia seems to have impacted EUR, which fell on the open yesterday and has extended losses. Leaders of the region have threatened to declare independence after the “successful” vote. EUR is down 0.6% to 1.1740 and is now down more than 2 big figures since Germany’s shock election result more than a week ago.
There’s not much to say about the NZD, which is down a touch to around 0.72, a level it has hovered around for the past five trading sessions. Against our short term fair value model it looks a little cheap, against the backdrop of risk appetite reaching its highest level this year and stronger NZ export commodity prices recently. But it is finding it difficult to made headway against the broadly-based USD recovery. Some of the crosses are stronger, with NZD/GBP up 0.7% to 0.5420 and NZD/EUR up 0.5% to 0.6130. NZD/AUD is flat around 0.92 and NZD/JPY is flat at 81.1.
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