The Australian dollar had a relatively volatile session overnight. AUD/USD gained initially on Australia’s strong retail sales for April, but gave back all of its gains to trade even lower in the next minutes, following the release of China’s Caixin manufacturing PMI for May. The Chinese index fell unexpectedly into contractionary territory for the first time in almost a year, generating renewed concerns about a slowdown of the Chinese economy. Bearing in mind Australia’s heavy trade exposure to China, should market participants begin to focus increasingly more on the prospect of such a slowdown, the Aussie could remain on the back foot for a while. Especially considering the continued decline in iron ore prices over the past couple of months.
AUD/USD traded lower after the disappointing Caixin PMI, falling below the support (now-turned-into-resistance) hurdle of 0.7420 (R1), before finding fresh buy orders near the 0.7385 (S1) zone and subsequently rebounding somewhat. In case market focus shifts back to a potential Chinese slowdown, or if iron ore prices continue to slide, we would expect the bears to retake control and aim for another test of the 0.7385 (S1) territory. A clear break of that area could initially aim for the 0.7365 (S2) zone.
Today’s highlights:
During the European day, we get the final manufacturing PMIs for May from several European nations and the Eurozone as a whole. Given that the final figures are expected to confirm the preliminary estimates, the reaction in the euro could remain relatively limited, unless we have notable revisions.
In the UK, the manufacturing PMI for May will be in focus and the forecast is for a decline. Even though this could hurt sterling somewhat, we think investors may prefer to wait for the services index that will be released on Monday before assessing how the UK economy performed in May. The service sector accounts for the vast majority of UK GDP. What’s more, we think that over the next week ahead of the General Election, UK political developments will probably overshadow economics and thus, incoming opinion polls could remain the key driver of sterling. New polls showing that the Conservative – Labour gap continues to narrow could weigh on the pound, and vice-versa. Indeed, yesterday the British pound recovered notably after several polls showed the Conservatives being safely ahead, casting doubts on the recent YouGov poll that showed Theresa May and the Conservative Party failing to secure an absolute majority in Parliament.
From the US, we get the ADP employment report for May. The forecast is for the private sector to have added 185k jobs, more than April’s print of 177k. Such a solid figure could raise speculation for the nonfarm payrolls print to also meet its forecast of 183k and thereby, support the dollar. We also get the ISM manufacturing PMI for the same month. Expectations are for the figure to have declined marginally, but still to remain safely above the critical 50 mark. In case of a solid ADP print but a modest slip in the ISM index, we think investors may focus more on the ADP figure, as tomorrow’s employment report will probably add the finishing touch to market expectations regarding a June rate hike.
USD/JPY rebounded yesterday after it hit support near the 110.50 (S1) territory. If the ADP print is solid today, we could see the latest rebound continue and perhaps challenge the 111.50 (R1) territory. A decisive break of that level could set the stage for further upside extensions, towards the 112.10 (R2) zone.
We have two speakers on the agenda: Fed Board Governor Jerome Powell and ECB Executive Board member Sabine Lautenschlager. It would be particularly interesting to hear from Powell, considering that he will be addressing the Economic Club of New York and that he is a permanent FOMC voting member that has not expressed his views on policy recently.
AUD/USD
Support: 0.7385 (S1), 0.7365 (S2), 0.7330 (S3)
Resistance: 0.7420 (R1), 0.7470 (R2), 0.7510 (R3)
USD/JPY
Support: 110.50 (S1), 110.20 (S2), 109.70 (S3)
Resistance: 111.50 (R1), 112.10 (R2), 113.10 (R3)
