Midday Update for Market Drivers for March 5, 2013
US ISM Services best since Feb 2012 – USD rallies
RBA statement keeps same language Aussie bounces
Nikkei 0.27% Europe 1.60%
Oil $90.56/bbl
Gold $1579/oz.

Europe and Asia:
AUD RBA Rate Decision no change same language
AUD AiG Performance of Service Index 48.5 vs. 45.4
AUD Current Account Balance =14.7b vs. -15.4B
AUD Retail Sales 0.9% vs. 0.4%
JPY Labor Cash Earnings 0.7% vs. -0.3%
EUR Euro-zone Retail Sales
GBP PMI Services 51.8 vs. 51

North America:
USD ISM Non-Manufacturing Composite 56 vs. 55.5

Risk currencies were as offered in midday New York dealing as they were bid earlier in European trade as better than expected US economic data bolstered the dollar rather than risk FX. US ISM Services – the most important pre-NFP report on the docket this week – beat estimates printing at 56.00 versus 55.00 eyed.

This was the best reading since February of 2012 and offered clear evidence that growth of the US economy has not been hampered by the increase in the payroll tax rate or the ongoing battles over the sequester of the US budget. The underlying details were as positive as the headline read with new orders increasing to 58.2 versus 54.4 prior while the employment dipped just lightly to 57.2 versus 57.5.

Although the employment component of the ISM has lost some of its predictive power recently, today’s figures suggest that the NFP estimates may be a tad low and that Friday’s report could print as high as 200K.

The positive ISM data helped fuel the rally in equities with the Dow hitting all time highs, but the upbeat sentiment did not extend into the currency market where both EUR/USD and GBP/USD fell in the aftermath of the release. The dynamic in the currency market has changed radically with high beta currencies no longer receiving the benefit of risk flows.

As US economy continues to decouple from both the EZ and UK and as the differential in GDP performance becomes wider, the dollar is suddenly taking on the characteristics of the growth trade as currency investors buy the buck on positive US data. It will be interesting to see if this trend persists into the NFP report in which case both EUR/USD and GBP/USD could break their recent lows without any additional bad economic news from those regions.

The only currency to hold its ground against the greenback this morning is the Aussie. In Australia, the better than expected Retail Sales which rose 0.9% versus 0.4% eyed provided some relief and cover for the RBA. This was the first month out of the past three that saw Retail Sales rise indicating that consumer demand Down Under is starting to stabilize after several months of contraction.

Meanwhile the RBA repeated the last paragraph from prior month’s meeting verbatim, noting that there was “scope for further easing”. However, recent commentary from AU monetary officials suggests that authorities are satisfied with the current monetary accommodation and believe that the stimulus already provided has yet to y make its way full through the system. Indeed today’s statement was generally a bit more upbeat regarding growth going forward.

The news helped to push Aussie higher with the pair hitting 1.0250 before profit taking kicked in. The Aussie has been under relentless selling pressure for the past several weeks, but today’s mildly hawkish RBA statement suggests that the central bank will remain stationary for the foreseeable future as aggregate demand appears to be improving. The pair therefore may have made a short term bottom for now and could recover towards the 1.0300 level as the week progresses.

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