China Sends Warning Signal; Buck Waits for ADP

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Market Drivers June 1, 2017
Aussie flips on weak CNY data
UK PMI Manufacturing in line
Nikkei 1.07% Dax 0.54%
Oil $49/bbl
Gold $1266/oz.

Europe and Asia:
AUD Retail Sales 1.0% vs. 0.3%
CNY Caixin PMI 49.6 vs. 50.1
GBP UK PMI Manufcaturing 56.7 vs. 56.5

North America:
USD ADP 8:15
CAD Markit PMI 8:30
USD ISM Manufacturing 10:00

Aussie was walloped today in morning Asian trade on the back of weaker Chinese Manufacturing PMI data that showed contraction for the first time eight months. The pair fell below the .7400 figure before finally finding some support into European trade.

The day started out well for Aussie bulls, with Retail Sales number rebounding strongly to 1% from a -0.1% contraction the month prior. But the rally did not last as just 15 minutes later the Caixin PMI printed at 49.6 versus 50.1 forecast – its first dip below the boom/bust line since November of 2016.

The Caixin PMI is a private survey of Chinese manufacturing activity and as such is much more trusted than the government figures. The fact that it declined this month suggests that Chinese growth may be slowing in the second half of the year, which could put all the optimistic assumptions about global rebound in doubt.

Certainly, the slowdown in Chinese growth is likely to impact Australia as both business demand, as well as consumer demand from Chinese, could cool considerably and keep the pressure on Aussie over the near term horizon. Some analysts are predicting that the unit will eventually fall towards the 60 cent mark as the long-term secular slowdown trends in Asia begin to weigh on the unit. In the meantime, the pair remains the relative loser for the day and could dip below the .7400 mark as the day progresses and US traders resume selling, especially if commodity prices provide no support.

In North America today, all eyes will be on the ADP report which comes in this month just one day ahead of the NFP number. The ADP is forecast at 185K versus 177K the month prior any reading above the 150K should appease the market. However, much like the other G-7 economies, US appears to have lost momentum as Q2 comes to a close and that may not bode well for the buck going forward. Right now the market assumes that the Fed will raise rates in June by 25bp – but that hike is factored in. For the dollar rally to really gain steam the market must become convinced that the Fed will remain on track to make 3 rate hikes this year. Right now that scenario is very much in doubt and unless US data shows marked improvement USD/JPY will continue to be capped at current levels.

Boris Schlossberg
Managing Director

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