Euro Shake Out Continues as 1.3500 in View

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Market Drivers for November 1, 2013
Euro liquidation continues as pair crumbles below 3550
UK PMI Manufacturing in line as cable hugs 1.6000
Nikkei -0.88% Europe -0.27%
Oil $96/bbl
Gold $1322/oz.

Europe and Asia:
AUD AIG Manufacturing 53.2 vs. 51.7
CNY PMI 51.4 vs. 51.2
GBP Manufacturing PMI 56 vs. 56.3

North America:
USD ISM Manufacturing PMI 10:00 PM

Euro continued to drift lower in Asian and morning European session trade coming within 10 points of the key 1.3500 support level as concerns over the low rate inflation in the region sparked speculation that the ECB will introduce fresh accommodation measures before the year end. Aussie on the other hand held their own boosted by positive economic data from both regions.

In Australia both the AIG and the Chinese Manufacturing PMI reports showed an improvement from the month prior. The AIG PMI rose to 53.2 from 51.7 the month past, while the official Chinese Manufacturing PMI reading increased to 51.4 from 51.2 eyed. The data showed that the manufacturing sector remains in an expansionary territory and that demand remains steady, alleviating fears of a slowdown in the region.

The Aussie popped to a high of 9490 before retracing a bit to 9460, but the pair remains well supported at the 9450 level on the assumption that the RBA easing cycle has ended. Given last night’s hotter than expected PPI data which came in at 1.3% versus 0.4% forecast, the prospect of any further RBA rate cuts does seem remote at best.

In UK the PMI Manufacturing came in at 56 versus 56.3 which was a little worse than expected, but the underlying data showed strength. Export orders were the highest since February 2011, purchase price inflation eased and domestic order demand grew as well.

Although manufacturing is a relatively small part of the UK economy, it should continue to contribute to the overall GDP figures in Q4. Cable dropped below the 1.6000 figure before the release on a broad dollar rally, but has remained steady at that level in the aftermath of the news

The euro was the weakest of the high beta currencies sinking to a low of 1.3510 before finding some bids ahead of the 1.3500 level. The unit has come under heavy liquidation as currency traders readjust their positions believing that the ECB will now become progressively more dovish as it tries to battle the deflationary forces in the region, while the Fed will turn to tightening as it considers a taper of QE early next year.

The surprisingly strong Chicago PMI number yesterday indicates that the US economy may not be as weak as the market believes despite the turmoil caused by the government shut down last month. Today ISM Manufacturing report will be the primary focus in North American trade and if it meet or beats the market consensus of 55, the dollar could get a further boost and EUR/USD could break the psychologically important 1.3500 level as the day proceeds.

Boris Schlossberg
Managing Director

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