A Tale of Two Cities in FX

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Market Drivers for Feb 1, 2013
Euro and yen soar while Aussie and cable tumble
EZ Final PMI lifts hopes of a rebound
Nikkei up 0.47% Europe up 0.42%
Oil at $97.32
Gold $1666/oz.

Europe and Asia:
AUD AiG Performance of Manufacturing Index 40.2 vs. 44.3
JPY Jobless Rate 4.2% vs. 4.1%
JPY Household Spending -0.7% vs. -0.2%
CHF SVME Purchasing Managers Index 52.5 vs.50.5
EUR Euro-zone PMI Manufacturing 47.9 vs. 47.5

North America:
USD Change in Non-farm Payrolls 8:30
USD Unemployment Rate 8:30
USD Average Hourly Earnings 8:30
USD Change in Household Employment 8:30
USD Underemployment Rate 8:30
USD U. of Mich Confidence 9:55
USD Construction Spending 10:00
USD ISM Manufacturing 10:00
USD ISM Prices Paid 10:00

Its been a tale of two cities in FX markets today with EURUSD and USDJPY soaring to fresh yearly highs while Aussie and cable tumbled on weak economic data and cross flow moves. In Europe the better than expected final PMI reading helped boost the EUR/USD past the 1.3650 level as the pair continued its relentless march higher on investor hopes of a recovery in the region.

The EZ PMI came in at 47.9 – still below the 50 boom/bust mark – but better than 47.5 expected. This was the slowest pace of decline in 11 months suggesting that the economic contraction in the region may be coming to an end. In the periphery, the Spanish PMI also improved to 46.1 from 44.6 the month prior.

The move in the euro has been truly spectacular as the pair has gone parabolic over the past several days having cleared the psychologically key 1.3500 barrier. As we’ve noted several times before, “The irony of life is that by refusing to participate in currency wars ECB has given us a strong euro by default”. However, the pair is now approaching levels that could start to hurt German exporters and could snuff out the budding recovery in the periphery. Therefore, we would not be surprised if EU monetary officials would start to signal their displeasure with the markets if the pair gained another 200-300 points this month. Such jarring moves are anathema to policymakers who constantly strive for stability in the financial markets.

Meanwhile USD/JPY also hit fresh highs as 92.00 figure gave way sweeping aside any option barriers in its way. The pair has also had a massive run-up and clearly positioning is now skewed to the long side at the extreme. That’s why today’s NFP could prove to be a market turning event if the data misses its mark. With most of the market anticipating a relatively decent print of 161K, anything less than 100K could provide a perfect excuse for some profit taking that could turn into a stampede and take us back below 91.00 level as investors re-adjust their expectations.

While EUR and USD/JPY remained well bid, the Aussie and cable sold off hard in Asian and early European session. Aussie was hit by the weaker than expected official Chinese PMI figures that showed a decline to 50.4 from 51.1 eyed. Australia’s own PMI data also missed printing at 40.2 versus 44.3 the period prior. The pair sunk below the 1.0400 figure and is now in danger of sliding below the 1.0350 barrier.

In UK PMI manufacturing data slightly missed its estimates but pound tumbled hard in early London trade -far in excess of reaction to the data – as fixing demand for EURGBP cross drove the currency to fresh daily lows. UK Manufacturing PMI came in at 50.8 versus 51.0 forecast with data for the month prior revised lower to 51.2.

Although the headline reading was a bit softer the underlying results suggested a modicum of strength with new orders component rising for the 3rd consecutive month. The news suggests that Q1 may be a bit better for the UK manufacturing sector especially given the fact that the currency has depreciated significantly against the euro.

EURGBP soared today to a high of .8649 as reported fixing demand in London took euro to fresh year to date highs while cable tumbled to a low of 1.5810. The action on the cross has been the primary driver of sterling weakness as investors continue to move back into euros on the unwind of the “EZ breakup” trade.

Cable has been staging a slow recovery this week after posting lows below the 1.5700 level but today’s price action knocked out many of the speculative longs after cable made the sharp reversal to the downside. Still the pair so far has managed to stay above the 1.5800 level and once the fixing flows are done, may try to rebound to the 1.5850 zone as the relief rally continues.

Boris Schlossberg
Managing Director

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