USD boosted by trifecta, RBA, Euro CPI awaited
City Index June 1, 2015 9:48 PM
<p>A crucially positive trifecta for the US dollar emerged today via a higher than expected May ISM manufacturing, ISM’s employment component and construction spending, boosting […]</p>
A crucially positive trifecta for the US dollar emerged today via a higher than expected May ISM manufacturing, ISM’s employment component and construction spending, boosting the greenback across the board. The figures had followed an earlier release of slower than expected US personal consumption and core Personal Consumption Expenditure price index (Fed’s preferred inflation gauge).
US May ISM rose to 52.8 from April’s 51.5, April construction spending jumped 2.2% from an upwardly revised 0.5% (prev was -0.6%), while the employment component advanced to 51.7 from 48.3. The rise in the prices paid component to a seven-month high of 49.5 from 40.5 appears to overshadow dovish implications from the unexpectedly weak 1.2% print in core PCE price index, which was the weakest in 14 months.
The ISM’s manufacturing’s May figure is a vital rebuttal of Friday’s release of May Chicago PMI, which hit contraction territory with a 6-point drop to 46.2.
Tonight’s RBA announcement
Tonight’s RBA decision would have been an uneventful development in had it not been for last week’s release of Australia’s Q1 capex figures, showing a 4.4% contraction (biggest since Q4 2013). The figure was especially alarming as it was accompanied by larger than expected decline in capex intentions for 2015-16 in both mining and non-mining capex. The latest private forecasts on 2015-16 capex have ranged from -20% to -35%, well below the -10% projection in last month’s RBA Statement of Monetary Policy.
Considering the aforementioned deterioration in Australia’s capex (in mining, manufacturing and services), the RBA may have no choice but to adopt a more aggressively dovish stance than in the May meeting. The three principal reasons for not expecting a rate cut in tonight’s meeting is that the Aussie’s sharp depreciation is in line with the RBA’s forecasts (and wishes), while jobs and house prices remain on the firm side. These conditions will afford the RBA the luxury to save its policy armoury and rely on the trade pass-through from further Aussie depreciation, particularly if the PBOC’s recent decision to refrain from injecting liquidity becomes a habit.
AUDUSD remains at risk if finally dipping towards the $0.75 support (five-year low), but prolonged EURAUD upside could be seen on a dovish RBA and restrained ECB, paving the way for 1.4580, near the 100-DMA.
And tomorrow’s Eurozone flash CPI
Before falling back to session lows due to those ISM and construction figures, the euro had rallied towards earlier session highs on higher than expected 0.7% y/y rise in Germany’s preliminary May CPI, following the 0.3% April rise. Germany’s increasingly tight labour market and recent recovery in energy prices have both been instrumental in the “reflation” trade as well as in supporting bund yields.
The seven-month high German CPI could pave the way for an upside surprise in Tuesday’s release of the Eurozone flash May CPI, expected at 0.2% y/y from April’s 0.0%, which would be the highest in six months. Recall that the euro had rallied aggressively upon the release of the April flash figures (at 0%), which suggested a possible end to Eurozone deflation.
Euro bulls will be hoping for a surprise on the core rate (excluding volatile food, energy, tobacco and alcohol items), expected at 0.7% from 0.6%. Further (temporary) euro stabilisation could ensue tomorrow on a combination of euro-positive CPI from the Eurozone and renewed declines in US factory orders. Yet, any EURUSD rebound is unlikely to exceed $1.1000 before Wednesday’s ECB announcement/press conference and US May services ISM.