EUR Pounded Towards Nine-Month Low

A number of Central Bank monetary policy rate announcements, combined with few G10 jobs reports will dominate the fundamental horizon for the remainder of this week. Already the forex market has taken a curve ball with the release of a record-low HSBC services PMI figure from China late last night. Aside from a few of its largest regional trading partners, the forex market again remains relatively contained. The noted overnight weakness in China's headline number (50 vs. 53.1) possibly reflects the impact of the ongoing property slowdown in many cities within the country – housing related activity see less business. On the plus side, China's employment and business sentiment indices remain somewhat stable and a relief for soft landing supporters.

One would have expected the AUD to wilt under such news, if so, only briefly, as the main antipodean currency rose strongly (AUD$0.9338) after the RBA kept its own cash rate unchanged and has left little room in its statement for any contemplation of further cuts. This is certainly aiding the most coveted of trades in a low rate environment – the “carry” trade funded by cheap EUR's.

The RBA's Governor Stevens kept rates at a 12-month low (+2.5%), despite mining investments cooling and a stubbornly strong Aussie. A percentage of the market was probably expecting more direct ‘jawboning' from Stevens, however, nothing overtly forthcoming just yet, but he admits that the outlook for the Aussie economy looks challenging. The AUD rallied despite the disappointing Chinese headline and another substantial trade deficit headline for June from Australia. The print (AUD$-1.68b vs. -$2.01b) was slightly narrower than expected, but still marked the economy's third consecutive contraction. The support is in the details – exports to China (it's largest trading partner) rose nearly +4%, while shipments of iron ore were up by nearly +5%, albeit from a downwardly revised volume for June. The AUD nemesis, like all the majors and EM currencies, remains rising US yields.

RBI more ‘hawkish'

The Reserve Bank of India's monetary policy statement is being perceived as more hawkish than anticipated, and is pushing any rate ‘cut' expectations further out the curve. They are staying on the sidelines, keeping their benchmark-lending rate unchanged at +8%. A true economic concern is that RBI policy makers continue to see upside risks to next years inflation target (+8%), citing higher potential food and energy prices. Governor Rajan seems to be preparing the RBI and the market for higher US rates, which will have an immediate and negative impact on EM currencies, especially for those economies whose fundamentals remain weak. The fixed income market is pricing in an RBI rate cut in Q1, 2015 when policy makers should have a better handle on the inflation horizon.

BoE to hike in Q4?

In the UK, July service PMI managed to print its highest level for the year earlier this morning. It's a tad surprising given the weakness seen in June. The sentiment reading (59.1 vs. 57.7) is not as high as Q4, 2013, but it certainly a healthy swipe that has managed to boost the pound outright (£1.6871) and on the cross (€0.7939). Digger deeper, and what should be supporting a BoE tightening cycle later this year is that it notes the indication of “capacity pressures” as the backlog of work rose at a “marked and accelerated pace,” and that a key driver for operating costs were higher wages for companies – certainly both of these are a test on spare capacity in the UK labor market. It should be a welcome boost for “hawks” advocating a November rate hike. The BoE MPC two-day meeting gets underway tomorrow, and reports like this increase the scope for dissent.

EUR heading lower

The EUR is back under pressure across the board, testing the lower boundary of support outright (€1.3388), and floundering just ahead of last week's nine-month low of €1.3366. Obviously, GBP has managed to the push the single lower ahead of stateside opening, retracing most of last Friday's strength, as support at €0.7927 come into focus. The final readings of July services PMI's in Europe came in as expected (54.2 vs. 54.4), with only Italy failing to show an improvement from June (52.8 vs. 53.9). The composite was at 53.8 vs. flash 54; nevertheless, both happened to beat the June prints. The data would indicate that the Euro-zone economy is growing at a quarterly rate of +0.4%. Analysts are suggesting that firms are cutting prices at a sharper rate – pushing the possibility of higher deflation risks.

The ECB is expected to remain on hold with rates and other policy action at its August 7 meeting. President Mario Draghi is likely to emphasize the long-term refinancing operation that will start in September, and the completion of the bank's asset-quality review in October. In respect to inflation, he is likely to downplay the Eurozone's recent drop to +0.4% in July from +0.5% in June, while highlighting lower energy prices and higher core inflation. For the time being, the EUR bear remains in control.