Can North America Save the Rally in Risk FX?

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Market Drivers October 24, 2012
Asian data (Chinese PMI, AUD CPI) surprises to upside sending risk higher
German data sinks risk rally as manufacturing contracts sharply
Nikkei -0.67% Europe -0.44%
Oil $86.93/bbl
Gold $1709/oz.

Europe and Asia:
AUD CPI 0.7% vs. 0.4%
EUR German PMI 45.7 vs. 48.1
EUR German IFO Business Climate 100 vs. 101.5

North America:
USD Markit US PMI Prelim 8:58
USD House Price Index 10:00
USD FOMC Rate Decision 14:15
CAD BOC Monetary Policy Report 10:30

The Euro reversed its Asian session rally gains in morning European trade after a series of economic reports came out suggesting that the economic situation in the region is becoming decidedly worse. German manufacturing PMI missed its mark printing at 45.7 versus 47.4 and sending EURUSD lower in early morning European trade as fears about a contraction in Eurozone’s largest economy offset earlier optimism over better Chinese PMI data. German services PMI also declined dropping below the key 50 boom/bust level as it printed at 49.7.

This was the first negative surprise in manufacturing readings in three months and the worst result since May when the PMI data stood at 45. The news clearly shows that German economic activity has slowed and is now in contractionary mode threatening drag the EZ-wide GDP into negative territory into the close of the year.

Investor sentiment took a further hit with the release of the IFO data which printed at 100 versus 101.5 as business morale hit a 32 month low. Companies’ assessment of the present situation fell for the fourth consecutive month to a 28-month low of 107.3. The six-month outlook was
unchanged at 93.2.

The dour German data stood as sharp contrast to the earlier better than expected reading from Chinese PMI which printed at 49.1 versus 47.9 the period prior. Although Chinese manufacturing remains in contractionary mode the latest reading indicates the world’s number two economy may be able to engineer a soft landing as demand appears to be stabilizing. As a result the euro has been battered against the commodity dollars which have remained buoyant in light of better data from China. The market will try to ascertain if today’s data was merely the result of spillover effects from the spike in sovereign debt yields at the end of the summer that cast a pall on credit conditions Europe wide or a deeper signal of stagnating demand.

US data may be key to the next move in risk today as traders get a peek at US Flash PMI readings and the existing home data. If US numbers surprise to the upside they, along with the better data out of Asia could serve as an offset to the disappointing news out of Europe and help revive risk appetite as US session unfolds. If on the other hand the US news also misses its mark risk aversion flows could accelerate as the day proceeds with EUR/USD breaking below the key 1.2900 barrier signaling that the pair could unwind most of its post OMT rally as hopes for EU economic rebound are dashed once again.

Boris Schlossberg
Managing Director

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