Intraday Market Thoughts

ISM Beat Helps Risk Trade, RBA Up Next

by Adam Button
Mar 6, 2012 2:12

Continued worries about a slowdown in China remained the overriding theme in US trading but an upbeat ISM non-manufacturing report prompted a modest comeback. On the day, NZD was the laggard with JPY leading. The RBA decision is the highlight of Asia-Pacific trading. Monday night's Premium Trades include a preview for RBA, USDCAD, EURGBP.

The ISM service sector reading improved to 57.3 compared to the 56.0 consensus, however the employment component slipped to 55.7 from 57.4. That is still a high level but limits the probability of an upside surprise in Fridays non-farm payrolls report.

The upside surprise limited the euros decline. After falling to 1.3160 on a series of soft European PMIs, EUR/USD rebounded to 1.3237 in the wake of the ISM data. Afterwards, it was a lackluster session with most pairs trapped in a tight range.

Yen buying was the theme due to the forecasted Chinese slowdown but also due to risks from central banks and non-farm payrolls later in the week. US equities were softer with the S&P 500 falling 0.4% to 1336. USD/JPY hit 81.55 post-ISM and was later range-bound.

The RBA decision will be announced at 0330 GMT and all 24 economists surveyed by Bloomberg are forecasting no change. The market is a tad more constructive with OIS pricing a 14% chance of a surprise rate cut. In the likely event of no change the focus will be comments about the future outlook. Australia yesterday reported a more than 6% fall in q/q corporate profits, suggesting there is the potential for layoffs. If the RBA notes these risks, as well as the chance of a Chinese slowdown, the market may begin to price in cuts before the end of the year.

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