Credit Agricole

Asia overnight: In Asian hours risk sentiment was broadly stable with mot regional stock market indices trading higher at the time of writing. This is partly due to better than expected business activity data out of China. In G10 FX, the risk sensitive NZD was among the outperformers. However, this is mostly on the back of better-than-expected Q2 employment data. At 4.0% (prev.4.7, cons. 4.4%) the unemployment rate came in well below consensus. So much should lay the ground for the RBNZ considering higher rates later this month with all its implications to the currency. Elsewhere, the AUD has been sticking to most of its recent gains as driven by more hawkish than expected RBA monetary policy announcement.

Looking ahead, trade data on Thursday will likely demonstrate medium-term underlying support for the currency. Indeed, strong iron ore prices as well as large export volumes will potentially see Australia will potentially log a record trade surplus. Importantly, Australia’s strong trade balance and current account surplus leaves the AUD less vulnerable to downside pressures from its lost interest rate advantage. European morning: All eyes on PMIs Data wise today’s focus will be on July Services PMIs out of Eurozone, UK and Sweden. Since Eurozone and UK data are final revisions, surprise potential seem slow.

This in turn implies low market impact with external factors such as global risk sentiment likely to remain in the driver’s seat. This is especially true as when it comes to the Euro with its strongly capped rate profile keeping funding attractiveness rather well supported. When it comes to GBP, investors’ main focus should have shifted to the upcoming BoE monetary policy announcement already. Turning to Sweden, incoming data is likely to confirm services-sector related business activity to continue expanding at a very healthy level. This is in line with forward looking indicators such as Economic Tendency Survey paining a more constructive picture on growth. At the same time, however, Riksbank members are unlikely to consider a change to their cautious monetary policy stance anytime soon with interest rates expected to remain capped for the entire forecasting horizon. So much is likely to keep the SEK’s sensitivity to better data low. All in all we stick to a neutral stance on the currency from here.

USD: Looking beyond the Fed

The US debt ceiling and fiscal stimulus While the patient Fed approach towards policy normalization is among the key drivers of the USD underperformance ,we think that additional factors may be playing a lore as well through their negative impact on UST yields and US rates. The first is the US debt ceiling suspension that has expired recently and which means that the US Treasury would have to restrict the issuance of new debt while drawing down its cash reserves (e.g. there could be some focus on the US Treasury quarterly financing announcement today). This has already created an environment of very subdued nominal and record low real UST yields. According to some estimates, the US treasury would not run out of spending power before October, suggesting that the politically-charged process of raising the debt ceiling could drag on in a foreseeable future. In turn, this can keep the current low UST yields and rates in place for longer and undermine the USD. The second USD driver seems to be the lingering uncertainty about the second fiscal stimulus package proposed by the Biden administration (and that consists of an infrastructure bill as well as a much larger (USD3.5tn) reconciliation package).

While a successful vote on the infrastructure bill in the US Senate this week can move the process forward, we may have to wait for the more important vote in the House until September when a compromise between the centrist and progressive Democrats on the size of the reconciliation package may be needed to get the fiscal stimulus package through the US congress. Importantly, a debt ceiling extension in conjunction with another aggressive fiscal stimulus deal could magnify the positive impact from Fed QE taper on the UST yields and US rates. Indeed, the confluence of the three factors could shake up the US FI markets in late Q3 and Q421. In turn, higher UST yields and US rates could prop up the USD towards the end of the year, especially vs the JPY and CHF that remain among the most sensitive G10 currencies to moves in the US FI markets. Data wise, today’s focus will be on the July ISM non-manufacturing PMI.

Our US economist expects it to post a modest increased to around 60.5 (prev. 60.1). He notes that the outlook for the sector has improved on the back of the reopening of the economy. From that angle upside risks cannot be excluded with such prospects potentially helping the greenback to regain ground. A main focus will be on the PMI’s employment component as lead over Friday’s labour data. Having said that, as outlined previously, any potential positive news about the outlook of the US labour market could bring the FOMC closer to policy normalization in our view and help the USD to regain ground.