We’re up 300 pips on the GBPAUD trade.  Risk should be moved to breakeven (2.0585).  Bullish potential remains significant.  There is currently a bearish opportunity in the EURUSD.

The EURUSD is expected to exceed 1.6018 and continue on to all-time highs in the next few weeks BUT a triangle may be unfolding in which case the advance from 1.5303 would be wave D and wave E would be underway now.  E waves of triangles are usually sharp and deep; so it is probable that the decline would continue until 1.53/1.54.  Given the proximity of the point where the triangle would be violated, reward to risk is heavily skewed in favor of bears for the next few days.

Most legs within triangles form zigzags.  Wave D (if it is a D wave) is a completed zigzag.  Wave c of the zigzag subdivides into 5 waves as it should, which instills confidence in placing risk just above 1.5843.  As mentioned, E waves are sharp so we should know if we are correct in our assessment right away.     

The Euro remains firm ahead of the ECB meeting on Thursday.  Yesterday, the June consumer price index estimate came in at 4% double the central bank’s 2% inflation target.  Today, Germany reported strong consumer spending and the lowest unemployment rate in 14 years.

Manufacturing sector PMI for the Eurozone was also revised higher in the month of June due to stronger activity in France and Germany.  The combination of higher inflationary pressures and better than expected economic data could force the ECB to backtrack on their warnings and actually prepare the market up for more than one rate hike in the third quarter.  Up until now the ECB has openly hinted that a rate hike in July will one-off, but given the recent reports, 2 rate hikes from the ECB this year is more than realistic.  Eurozone producer prices are due for release tomorrow and given the rise in wholesale sales and import prices, we expect the PPI number to be hot.  A 50bp rate hike by the ECB on Thursday may not be out of the question.  Meanwhile Swiss PMI numbers hit a 3 year low while the prices paid or inflation component of the report jumped to a 1.5 year high.

Economic activity in the manufacturing sector has grown in June after four months of contraction, according to the latest Manufacturing ISM Report on Business.

Manufacturing expanded in June, as the PMI rose to 50.2, inches above 50, which marks the boundary between expansion and contraction of the sector’s activity. June’s increase has followed four consecutive months of contraction, in May, the PMI was 49.6.

The new orders index has edged down to 49.6 in June from 49.7 in May, while the production index rose to 51.5 in June from 51.2 in May. The employment index has dropped 1.8 points to 43.7 points. The prices index has risen to 91.5, its highest level since the 93.2 in July 1979.
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Bounce-back in manufacturing in June suggests that modest growth remains the baseline story. Production improved while orders were steady. Employment remains sub-par. Input prices; however, remain very high and will put downward pressure on profits. In contrast, export orders remain solid for machinery companies among others.

Production Up, Orders Steady: Growth Still Positive

• The production index, which originally fell below breakeven in March, picked up in May and remained in positive territory. By industry, there were gains in computers, petroleum, food and chemicals.
• Employment stayed below the 50 breakeven level for the eight straight month, suggesting continued job losses in June.

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Export Orders Up Big, But Prices an Issue for Profits

• New export orders came in at 58.5 and continues to be a bright spot for the economy. Export strength has been the major supporter of the manufacturing sector in recent months and has contributed to positive GDP gains the last two quarters.
• Prices paid remain a key worry across the economy. The high level of this index suggests continued profit pressures ahead.

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The negative sentiment for the greenback continues as still investors lack confidence in the U.S economy as they feel that it not performing any better. Today the U.S is releasing fundamentals concerning the manufacturing sector as it is expected to show that the economy is still contracting since costs of raw materials and energy rally are eating through the pockets of businesses and consumers.

The Euro Zone today released its PMI manufacturing for the month of June final reading coming in at 49.2 slightly higher than the prior and projected reading of 49.1 respectively, since the reading is below the 50.0 level the economy is considered to be contracting. As for Germany they released their retail sales showing a great jump for both the annual reading and the monthly reading so this is helping support the EU slightly. There are expectations that the ECB will hike interest rates on Thursday by 25 points as Jean-Claude Trichet is taking a hawkish tone. Today the euro is struggling to break the major support of 1.5730 while trading under a resistance of 1.5775 at 1.5766. The EUR/USD pair recorded a high of 1.5777 and a low of 1.5722.

Despite the U.K economy releasing their PMI manufacturing showing a slip by 4.2 to 45.8 the royal currency is still gaining on the back of the weak greenback. The British pound hit a major support at 1.9896 as it started to form a strong bullish wave working its way upside to reach the psychological level of 2.0000. The GBP/USD is currently trading at 1.9980 while recording a high of 2.0002 and a low of 1.9887 so far.

The unwinding of carry trades still continue in the markets as investors are risk averse in which they sell high yielding currencies and buy low yielding currencies like the yen while stock markets remain to record losses. Using the Stochastic Oscillators on a daily basis we see that the yen in trading in an oversold area as the USD/JPY broke the support of 105.70 successfully and if the downtrend continues, it will hit the next support at the level of 105.00. The pair is currently trading at 105.44 while recording a high of 106.37 and a low of 105.32.

Crown Forex

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US ISM Manufacturing up today. CAD also weaker as oil rally attempt fails to hold.

MAJOR HEADLINES - PREVIOUS SESSION

• Australia Jun. AiG Performance of Manufacturing Index out at 47.0 vs. 51.2 expected
• Australia May HIA New Home Sales out at -5.0% vs. +0.1% in Apr.
• Japan Q2 Tankan Survey out at 5 vs. 3 expected
• China Jun. Manufacturing PMI out at 52 vs. 53.3 in May
• Japan May Labor Cash Earnings rose 0.2% YoY vs. 0.7% expected.
• Australia RBA Cash Target was kept at 7.25% as expected
• Germany May Retail Sales out at 1.3% MoM vs. 0.8% expected
• UK Jun. Nationwide House Prices out at -6.3% YoY vs. -6.4% expected

THEMES TO WATCH - UPCOMING SESSION

Key event risks today (all times GMT):

• Sweden Jun. Swedbank PMI (0630)
• Switzerland Jun. SVME PMI (0730)
• EuroZone Jun. Manufacturing PMIs (beginning 0745)
• Germany Jun. Unemployment Rate (0755)
• UK Jun. Manufacturing PMI (0830)
• US Jun. ISM Manufacturing and Prices Paid (1400)
• US May Construction Spending (1400)
• US Weekly ABC Consumer Confidence (2100)
• US Fed’s Lockhart to speak (2200)
• Australia DEWR Skilled Vacancies (0100)
• Australia May Retail Sales (0130)
• Australia May Building Approvals (0130)

Market Comments

AUD weakened further overnight on ugly Manufacturing PMI data and the RBA rhetoric, which leaned clearly to the dovish side of expectations. The reversal in AUDUSD was especially interesting after the pair briefly etched a new 25-year high before testing below its 10-day EMA ahead of the start of the European session. The RBA said that the current interest rate stance is appropriate, that inflation should decline over time, that there already has been substantial tightening, that demand growth will be mdoerate this year and that the labor market is showing tentative signs of easing - just to select some of the more dovish comments. Clearly, the RBA is in look and see mode and we should take the incoming data seriously this week, starting with tonight’s Retail Sales and Building Approvals numbers. Further ugly data could lead to more AUD weakness.

JPY crosses are back lower this morning after the Tankan survey was far better than expected. It seems the market may have gone over-bearish on the Japanese situation. The bearish argumen goes that the pressures of higher commodity costs are being felt on Japan just like everywhere else, but that they bit harder there due to the weak economy and its high dependence on raw materials imports and the likely inability of the BoJ to raise rates. The positive data could see JPY crosses under pressure today, particularly on any renewed pickup of the bond market rally/equity sell-off. USDJPY survived a test of the 55-day moving average yesterday at 105.00, which now looks like an important support level for the pair.

German bunds plummeted yesterday unlike their US counterparts on the rise in EuroZone June inflation data to 4% from 3.7% in May. Nevertheless, EURUSD was under pressure for most of the session after briefly trying at the big 1.5800/50 area resistance. Some of the USD strength may have been due to end of month/end of quarter effects. Today’s US ISM will likely decide whether we see a further correction back into the range or a renewed rally attempt.

As this is going to press, we see GBP rallying a bit after a slightly stronger than expected Nationwide house price data point for Jun. GBP can do what it wants, but rallying on this number looks rather silly in the bigger picture - the RICS house price balance has a perfect record of leading the Nationwide number by several months. Considering the steepness of the declines in the RICS in the last several months, the Nationwide number is likely headed toward -15% or worse in the coming months…

Chart: USDCAD

USDCAD made a stronger statement yesterday with a follow up on last Friday’s slightly bullish reversal. After trying lower through the 55-day moving average once again yesterday, the pair rallied sharply as yet another oil rally faded and on a stronger than expected US Chicago PMI number. The risk for the bullish view is that yesterday’s rally was merely due to end of month/quarter effects. We eventually look for a break of the top of the range, with the short term important coming in with the 55-day SMA

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The British pound lost ground against the US dollar as economic data confirmed further softening in the UK economy.

GfK Consumer Confidence hit a record low as worries of high oil prices, turbulent housing market and tight lending conditions took its toll on the locals. Markets reacted sharply to this unexpected drop, as the realization of turbulent times ahead dawned on investors. Record low Mortgage approvals raised further concerns amongst traders who know that the UK housing market is the Achilles heel of the UK economy.  Looking ahead, Nationwide Housing Prices and Manufacturing PMI figures are expected to show further weakness, but we actually think that the manufacturing data could improve given the rise in the CBI industrial trends survey. If this is true the British pound should continue to rally.

A failure of follow-through on the rumors of a surprise SNB rate increase coupled with uncertainty over the fate of the US economy as the Fed shifts to neutral amid record-setting weakness in the US labor market has seen USDCHF settle into a range.

Trading Tip – Labor market statistics have gained particular prominence as last month’s US unemployment rate saw its largest gain in 22 years. Consumer price gains for Switzerland may also increase volatility as the SNB has been rumored to issue a one-off rate increase. Traders may want to exert particular caution around these releases, with the most conservative opting to remove pending entries until the event risk has passed. In addition to a stop loss, we will look to control risk further by removing any unfilled orders by the end of the week or should spot close above 104.53.

Event Risk for the US and Switzerland

US – Significant US data releases begin this week with the June ISM Manufacturing Index. The metric is expected to decrease further, coming in at 49.0 from a previous 49.6. Values greater than 50 generally indicate expansion while values below 50 indicate contraction. At the top of the radar is Thursday’s release of the June Change in Nonfarm Payrolls, which is expected to print at -55k from April’s -49k. Last month’s release saw the largest one month jump in the unemployment rate in 22 years as the metric rose to 5.5%. Unemployment is expected to ease a bit this time around, printing at 5.4% though the economy is still seen losing -55k jobs..

Switzerland – The only major data release this week is the CPI for June, expected to increase to 3.1% (YoY) from 2.9% the month prior. As inflation creeps away from the SNB target of 2.0% significant increases in the CPI may provide the bank with substantial enough reason to raise rates during their next meeting.

To contact Ilya and Luis with comments regarding this or other articles they have authored, please email them at research@dailyfx.com.

What Are The Markets Facing?

The Institute for Supply Management is expected to report at 10:00 EDT that their survey of conditions in the manufacturing sector held below 50 - signaling contraction - for the fifth consecutive month at 49.0. In fact, data from the New York, Philadelphia, Chicago and Richmond Federal Reserve regions all showed a continued deterioration during the survey period. That said, these are all very volatile reports, but given broadly weak domestic demand in the US, the risks are tilted to the downside for the ISM manufacturing release. The employment component will also be watched carefully as a gauge for Thursday’s Non-farm Payroll report. NFPs are expected to fall negative for the sixth consecutive month, which would normally raise expectations for rate cuts by the Federal Reserve. However, with the FOMC actually expected to raise interest rates by September, futures may simply move to price in no change in policy. Nevertheless, if we see that the manufacturing sector report on Thursday and other data, including NFPs, prove to be disappointing, the markets may remain wary that despite the 1.0 percent gain in Q1 GDP, the economy is in or nearing recession.

Bonds - 10-Year Treasury Note Futures

Treasuries have bounced quite a bit from support at 112-00, and a bout of risk aversion market-wide has ed the contract to climb higher in recent days. Looking ahead to Tuesday, ISM Manufacturing is expected to slip lower and hold below 50 - signaling contracting - for the fifth consecutive month. If the index falls in line with or more than forecasts, the contract could climb toward the 200 SMA at 114-14, with additional resistance from falling trendline looming above at 115-21. On the other hand, a stronger-than-expected reading could weigh Treasuries down below 114.

FX - EUR/USD

From a long-term perspective, EUR/USD continues to trade within a wide range of 1.5350 - 1.5800, as the US dollar consolidates across the majors. However, the pair remains very much within an uptrend, as EUR/USD bounced from trendline and 100 SMA support just a few weeks ago. Looking ahead to Tuesday, ISM Manufacturing is anticipated to slip lower and remain below 50, signaling contraction in the sector for the fifth consecutive month. As a result, EUR/USD could edge higher for a test of 1.5780/5800. On the other hand, a surprisingly strong reading could send the pair tumbling toward 1.5700/20, though sharper declines could take aim on 1.5630/50.

Equities - Dow Jones Industrial Average

Equities market experienced a mixed session on Monday as the DJIA held up above near-term support at 11,300. However, financial stocks continue to weigh on the markets as credit concerns and fears of additional multi-billion dollar write-downs persist. Looking ahead, the release of ISM Manufacturing could weigh the DJIA for additional tests of 11,300, as the index us expected to signal contraction for the fifth consecutive month. However, a better than expected release could help equities gain traction to target near-term resistance at 11,500.

DailyFX

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Investment in the currency exchange is highly speculative and should only be done with risk capital. Prices rise and fall and past performance is no assurance of future performance. This website is an information site only. Accordingly we make no warranties or guarantees in respect of the content. The publications herein do not take into account the investment objectives, financial situation or particular needs of any particular person. Investors should obtain individual financial advice based on their own particular circumstances before making an investment decision on the basis of the recommendations in this website. While we try to ensure that all of the information provided on this website is kept up-to-date and accurate we accept no responsibility for any use made of the information provided. All intellectual property rights are the property of Daily FX. Daily FX and its affiliates, will not be held responsible for the reliability or accuracy of the information available on this site. The content herein is provided in good faith and believed to be accurate, however, there are no explicit or implicit warranties of accuracy or timeliness made by Daily FX or its affiliates. The reader agrees not to hold Daily FX or any of its affiliates liable for decisions that are based on information from this website. Daily FX highly recommends that before making a decision, the reader collects several opinions related to the decision and verifies facts from at least several independent sources.

• Euro: Alternatives for the ECB
• British Pound: Consumer Confidence Hits Record Low

US Dollar: End of Quarter Flows

When the European markets opened for trading this morning, the greenback came under the same brutal selling pressure that we have seen throughout the previous trading week. The US dollar even fell to a new 25 year low against the Australian dollar, but quarter end flows quickly hit the markets, helping the dollar recover all of its earlier losses. Today is the end of the second quarter and also the end to the first half of the year. Although 2008 has been marked by dollar weakness, the dollar’s performance in the second quarter has been mixed. It is virtually unchanged against the Euro, down more than 5% against the Australian dollar and up more than 5% against the Japanese Yen. Interestingly enough, the Yen and not the dollar has been the worst performing currency this quarter. The Japanese Yen has fallen against every major G-10 currency. It is going to be a very active week for the currency market. The ECB interest rate decision and the non-farm payrolls report collide to create the perfect storm for the US dollar. What ECB President Trichet says about future rate hikes should be more important than the non-farm payrolls report, unless of course job losses are more than 100k. Chicago PMI was slightly stronger than the market expected, but still in contractionary territory. This suggests that the national ISM manufacturing index, which is due for release tomorrow, should continue to trend lower. The Philly Fed, Empire State and Richmond Fed manufacturing indices have all fallen sharply, painting a grim outlook for the US manufacturing sector. The rise in energy prices is now offsetting any stimulative effects from a weaker dollar. Going forward, we expect more US companies to struggle with the difficulties of containing costs as oil prices climbed to an intraday high of 143.67 a barrel.

Euro: Alternatives for the ECB

A 25bp interest rate hike by the European Central Bank on Thursday has been completely priced into the market, but there are increasing signs that the central bank may have to raise interest rates beyond July. The estimate for Eurozone consumer prices for the month June is 4 percent, double the ECB’s 2 percent inflation target. This spike in inflation complicates the central bank’s task on Tuesday. Up until now the ECB has openly hinted that a rate hike in July will one-off, but with inflation pressures continuing to increase, can they really increase interest rates by only 25bp this year? Probably not. We believe that Trichet is mulling over 2 additional alternatives for Thursday. He could proactively clamp down on inflation by raising interest rates 50bp or he can raise interest rates by 25bp and leave the door open for another rate hike this year. Closing the door completely could be mistake especially if oil prices continue to rise. German retail sales and employment numbers are due for release tomorrow. Given the sharp drop in the retail PMI index, consumer spending in Germany should remain weak. Swiss PMI is also due for release. The dovish comments from the Swiss National Bank suggest tepid manufacturing activity.

British Pound: Consumer Confidence Hits Record Low

The British pound lost ground against the US dollar as economic data confirmed further softening in the UK economy. GfK Consumer Confidence hit a record low as worries of high oil prices, turbulent housing market and tight lending conditions took its toll on the locals. Markets reacted sharply to this unexpected drop, as the realization of turbulent times ahead dawned on investors. Record low Mortgage approvals raised further concerns amongst traders who know that the UK housing market is the Achilles heel of the UK economy. Looking ahead, Nationwide Housing Prices and Manufacturing PMI figures are expected to show further weakness, but we actually think that the manufacturing data could improve given the rise in the CBI industrial trends survey. If this is true the British pound should continue to rally.

Australian Dollar Hits Fresh 25 Year, Canadian Dollar Collapses

The Australian Dollar hit a fresh 25 year high against the greenback before reversing violently to end the day lower. Expect the volatility in the Aussie to continue with manufacturing sector PMI and the Reserve Bank of Australia interest rate decision scheduled for this evening. Even though the RBA is not expected to alter interest rates, the recent price action of the Australian dollar suggests that the market expects hawkish comments from the central bank. According to the TD Securities inflation index, price pressures continue to grow, which validates the recent speculation. Meanwhile the New Zealand dollar is the only commodity producing country to end the day stronger against the greenback. Business confidence has improved significantly with the NBNZ confidence index increasing from -49.7 to -38.7. The Canadian dollar on the other hand completely shrugged off its better than expected Q2 GDP numbers and higher oil prices. Profit taking on the last trading day of the year and ahead of Canada day (Tuesday) is the only reason to explain today’s move.

Japanese Yen: Quarterly Tankan Report on the Calendar

The volatility in the Dow has caused a significant amount of volatility in the Japanese Yen crosses. The US dollar broke below the 105 level shortly after the London open but ended the day higher against the Japanese Yen. Aside from NZD/JPY, the other Yen crosses ended the day the lower. The JMMA Manufacturing PMI figures fell to a 6 year low, along with depressed Housing Starts and Construction Orders. Looking ahead, the Quarterly Tankan report which measures business confidence is due for release. Given the slowdown in the global economy, the market expects business confidence to deteriorate materially.

DailyFX

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Investment in the currency exchange is highly speculative and should only be done with risk capital. Prices rise and fall and past performance is no assurance of future performance. This website is an information site only. Accordingly we make no warranties or guarantees in respect of the content. The publications herein do not take into account the investment objectives, financial situation or particular needs of any particular person. Investors should obtain individual financial advice based on their own particular circumstances before making an investment decision on the basis of the recommendations in this website. While we try to ensure that all of the information provided on this website is kept up-to-date and accurate we accept no responsibility for any use made of the information provided. All intellectual property rights are the property of Daily FX. Daily FX and its affiliates, will not be held responsible for the reliability or accuracy of the information available on this site. The content herein is provided in good faith and believed to be accurate, however, there are no explicit or implicit warranties of accuracy or timeliness made by Daily FX or its affiliates. The reader agrees not to hold Daily FX or any of its affiliates liable for decisions that are based on information from this website. Daily FX highly recommends that before making a decision, the reader collects several opinions related to the decision and verifies facts from at least several independent sources.