Market Drivers Mar. 1, 2016

RBA Stays on Hold at 2%
EZ GE Unemployment steady
Nikkei -0.69% Dax 1.02%
Oil $34/bbl
Gold $1242/oz

Europe and Asia:
CNY PMI Manufacturing 49 vs. 49.4
EUR GE Unemployment -10 vs. -10
GBP UK PMI Manufacturing

North America:
USD ISM Manufacturing 10:00

Risk FX was generally well bid in early European trade today after some turbulence in Asian session trade with USD/JPY popping back above the 113 mark by mid morning European dealing. Earlier yen strengthened significantly in very early Asian session trading during the least liquid time of the day when the pair fell all the way to 112.15 in a matter of minutes. There was no news on the move and traders suspected stop running as EUR/JPY tripped levels and dropped to it lowest reading in 3 years.

By European hours however, risk appetite appeared to have returned and currencies settled into a comfortable range boosted by better than 1% gain on stocks. The Aussie remained above the 7100 figure after the RBA left rates on hold at 2%. The RBA statement was relatively sanguine with the central bank noting that while inflation remained low – providing scope for more cuts, “Recent information suggests that the global economy is continuing to grow, though at a slightly lower pace than earlier expected.”

The Australian authorities offered little concern over the recent slowdown in demand in Asia and the sharp falloff in employment data in Australian data last month. Some traders speculated that perhaps the RBA officials had an early glimpse at the GDP numbers due tomorrow and that those numbers suggest that growth Down Under remains on pace for the time being.

In Europe the labor data statistics showed a mild uptick with unemployment rate declining to 10.3% from 10.4% eyed. German unemployment data was also in line at -10K which was lower than the month prior reading of -19K but still showing a steady reduction in joblessness. Euro was very quiet trading between 1.09 and 1.0850 for most of the night as risk on flows actually pushed it a bit lower despite decent economic data. The pair remains in a steady decline ahead of the ECB meeting next week as traders anticipate further easing from Mr. Draghi and company given the strong deflationary forces that still persist in the region.

In UK the PMI Manufacturing data was horrid stopping just short of the 50 boom/bust line as it missed its mark printing at 50.8 versus 52.3 eyed. Both domestic demand and exports slowed markedly indicating a slowdown in the sector. The bulls took some solace from the fact that the data did not reflect the lower exchange rates that would prove stimulative to exporters but the bigger picture to emerge from report is one of dampened demand which bodes poorly for the overall economy.

Although manufacturing is a minor part of the UK economy if the same trends appear in the services report due later in the week it would suggest that UK economy is slowing more than the market anticipates and the downward pressure on cable should resume. In the meantime however, traders shrugged off the news and sent sterling flying through the 1.4000 figure squeezing late shorts. The volatility in the pair may continue with 1.4000 likely the key battle for the rest of the day, but the current rally won’t have legs if data doesn’t prove supportive.

In North America today the focus will shift to ISM Manufacturing due at 1500 GMT with markets looking for another sub 50 reading. Yesterday’s weak Chicago PMI report which dropped by nearly 5 points may be a bad omen for the whole sector and certainly adds to the body of evidence that demand is slowing. If the number does miss it could push USD/JPY right back below the 113 figure as the day proceeds.

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