Market Drivers September 20, 2012
Chinese PMI prints below 50 for 11th month in a row
EZ Flash PMI show serious deterioration in France
Nikkei -1.57% Europe -0.80%
Oil $91/bbl
Gold $1765/oz.

Europe and Asia:
JPY BOJ Monthly Economic Report
JPY BOJ Governor Shirakawa Speaks
JPY Merchandise Trade Balance 0.47T vs. 0.31T
JPY All Industry Activity Index -0.6% vs. -0.5%
NZD GDP 0.6% vs. 0.4%
EUR German PPI 0.5% vs. 0.4%
EUR German PMI 50.6 vs. 48.2
EUR Eurozone Consumer Confidence
GBP Retail Sales -0.2% vs. -0.4%

North America:
USD Initial Jobless Claims 8:30
USD Markit US PMI Preliminary 8:58
USD Philly Fed 10:00
USD Fed Reserve Flow of Funds Report 12:00

Risk FX came under heavy assault in Asian and morning European session as continued weakness in Chinese economic activity along with sharp contraction in French flash PMI readings weighed in investor sentiment sending EURUSD lower by more than 100 points since the close of New York trade yesterday.

The HSBC flash PMI ticked up to 47.8 in September from a nine-month low in August of 47.6, but remained below the 50 boom/bust level for an 11th month in a row, showing that the sector was still contracting. An output index hit a 10-month low suggesting that demand continues to decline as Chinese economy slows into the year end. The news sent commodity currencies sharply lower with Aussie breaking below the 1.0400 barrier while kiwi reversed its earlier GDP-led gains to trade back towards the 82.00 figure.

However, the true body blow to risk tonight came from the very disappointing French flash PMI data with manufacturing diving to 42.6 from 46.5 eyed while services declined to 46.1 from 49.5 as they moved further into contractionary mode. French data indicates that its economy is acting more like the periphery Club Med members rather than the solid performance of the core. In contrast, German data improved with manufacturing increasing to 47.3 versus 45.4 while services actually moved to expansionary mode of 50.6 versus 48.5.

The key question going forward is whether the dichotomy in performance between France and Germany will create a greater sense of urgency to unify financial institutions in order to stabilize conditions in the Eurozone or whether tonight’s results will only make Germany more resistant to any plans for fiscal stimulus and transfer payments.

Meanwhile the Spanish auction of 3 year and 10 year debt went off without a hitch as the country was able to borrow 4.8 Billion versus 4.5 Billion eyed with rates on the 10 year dropping by nearly 100 basis point from the period prior. However, the results failed to produce any uptick in EURUSD as investors worried that the deteriorating economic conditions in the region would eventually put fresh upward pressure on yields in the foreseeable future.

Today’s North American session carries a trio of important reports including jobless claims, Philly Fed and flash PMI readings. If the data misses expectations showing further contraction in the US economy it will contribute to the overall risk averse sentiment that has dominated trade for most of the night and could push EURUSD all the way to a test of the 1.2900 level as the unwind of the rally continues. If on the other hand, the data shows some surprising resilience in US demand that could turn sentiment quickly and send EURUSD back towards the 1.3000 level in a short covering squeeze.

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