CHF Jumps to End Month, China PMI Upcoming by Adam Button

The month began with fireworks but ended with on a quiet note as risk appetite inched higher on positive data from the US. The Swiss franc easily led the market after the government said it accepts the strong CHF. Australian retail sales and China’s manufacturing PMI are the highlights of the upcoming session.

US economic data was surprisingly strong:

- Chicago manufacturing PMI at 56.5 compared to 54.8 exp. and 58.8 prior

- Factory orders up 2.4% in July compared to +1% exp.

- ADP employment at 91K vs. 103K exp

The Australian dollar was the second-best performer after CHF on the positive sentiment generated from the data. The S&P 500 gained 0.5% to 1219. Gold fell by $2.

The Swiss government unveiled a stimulus plan to counteract the squeeze on growth due to the strong CHF. The SNB announced no new measures in the currency forwards market after making an announcement on three of the past four Wednesday’s. The moves signal a change in tactics for the Swiss toward learning to live with the strong franc, rather than fighting it.

The euro fell on a rumour about Greece hiring a New York law firm to explore leaving the Eurozone.

Canada’s GDP report was mixed as the economy contracted 0.4% (annualized) in Q2 compared to the +0.1% expected. CAD initially declined but rebounded on some of the details of the report. The negative reading came on the heels of 3.6% growth in Q1 and is partly due to a number of factors, including the Japanese disaster and temporary shutdowns in the energy sector. Trade was a large negative drag due to the strong Canadian dollar but domestic demand rose at a 3% annualized rate and business investment rose 31%. A recession is unlikely but it can’t be ruled out either due to shocks from the US. The chief CAD risk is that we see the BOC taking a more accommodative stance.

Month End

JPY was the top performers in August while NZD and CHF lagged. The S&P 500 fell 5% in August in the fourth consecutive monthly decline. Gold gained 12.7%, silver rose 5.75% and oil fell 7.2%.

Glancing at the monthly charts, the downward trend in USD/JPY appears well-intact while a reversal appears to be underway in USD/CHF. The EUR/USD and GBP/USD chart shows very little direction. In the commodity currencies (especially CAD) signs of a change in trend are apparent but it’s more likely to be sideways than down.

Asia-Pacific Preview

July Australian retail sales at 0130 GMT are expected up 0.3% after a 0.1% contraction. At the same time, private new capital expenditures are expected up 4.1% in Q2 after a 3.4% prior rise.

China’s August manufacturing PMI will be released at 0200 GMT and is expected at 51.2 in Aug after a 50.7 reading in July. Earlier in the week, HSBC’s flash PMI was stronger than expected so the market has likely priced in a reading higher than the consensus. Expect to see a 30-40 pip reaction in AUD to this report.