â€¢ Australian Dollar: Business conditions index highest in 13 years
â€¢ Japanese Yen: Boosted by risk aversion
â€¢ Euro: Trades off 1.4500 as equities dive
â€¢ Pound: PMI Services
â€¢ US Dollar: ISM Services on tap
As trading began this week, the declines in Tokyo, Shanghai and Honk Kong stock markets pressured the carry trade in the currency market and dragged the EURUSD down below the 1.4500 figure. With the announcement over the weekend that Charles Prince of Citibank is the second high profile CEO of a major US bank to resign, capital markets continue to be concerned about the fallout from the subprime loan losses on the US financial sector.
Furthermore, with EURUSD at near record highs against the greenback the question facing the currency market this week is how much more room to the upside is left in the pair? Given the fact that US data was surprisingly strong last week, we continue to believe that further progress in the EURUSD will be limited in the near term. Not only is the pair grossly overbought on a technical basis, but the higher exchange rates of the euro are likely to weigh heavily on the regions industrial sector, limiting any policy tightening moves by the ECB.
Certainly, the hit to manufacturing was evident in UK today, where both Industrial and Manufacturing Production missed badly printing at â€“0.4% and â€“0.2% versus 0.2% and 0.4% expected with the pound dropping nearly 100 points as a result. Not only was the news bad in the UK manufacturing sector but the PMI Services survey suffered a much bigger decline than expected dropping to 53.1 from 56.7. Cable, which has been one of the strongest currencies last week may be vulnerable to a pullback as the week unfolds. Although the BoE which meets on Thursday is expected to keep rates on hold for the rest of the year, should UK data begin to deteriorate, the markets may reevaluate their neutral bias on UK rates and begin liquidating sterling in earnest.
Finally, the markets will get a look today at the US ISM Non-Manufacturing survey and it will be interesting to see if the services sector will confirm the latest string of sunny data from US. One reason for dollar near universal weakness over the past month has been the bears contention that US is on the verge of tipping into a recession. While the housing and financial sectors of the US economy remain a disaster, the rest appears to be remarkably resilient. If ISM, today provides evidence of underlying strength, the relentless one way slide of the greenback may come to a halt.