Will US Sidestep the Global Slowdown?

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Market Drivers January 6, 2015

UK Svc PMI misses by wide margin cable drops below 1.5200
EZ Final PMIs weaker
Nikkei -3.02% Europe 0.01%
Oil $49/bbl
Gold $1213/oz.

Europe and Asia:
AUD Trade Balance -0.93B vs. -1.59B
CNY PMI Svc. 53.4 vs. 53
EUR EZ PMI 51.6 vs. 51.9
GBP UK Svc PMI 55.8 vs. 58.9

North America:
USD ISM NON Manufacturing 10:00

It’s been yet another night of risk aversion in the currency market with Nikkei dropping by more than 3% while oil slipped below the psychologically key $50/bbl mark. The slide in equities weighed on USD/JPY which fell below the 119.00 figure and dragged most of the yen crosses with it.

On the economic front the news was not any better with both EZ and UK PMI continuing to signal a slowdown in the G-7 universe. In Europe the picture was generally mixed with German and French PMI data showing a modicum of improvement as French services gauge climbed to 50.6 rising into expansionary territory. Germany’s services PMI improved as well t0 52.1 from 51.4, however the data out of Italy was horrid – dropping to 49.4 from 51.4 eyed.

Italy remains a key concern in the EZ especially in light of the political upheaval in Greece. Although recent reports have suggested that German’s are non-plussed about the the prospect of a “Grexit” they may quickly change their mind if the desire to leave the EMU spreads to Italy where no amount of stimulus appears to be helping as the economy there grinds to a halt.

The EUR/USD drifted lower to test the 1.1900 level for the second time in two days but once again found buyers at that level for the time being. The spike low of 1.1865 made yesterday on the very sloppy Asian open will now be the key support point for the pair as it continues to see selling pressure on investor worries over the economic and political viability of the region.

Meanwhile in UK the Services PMI saw a sharp drop lower to 55.8 from 58.9 forecast. New orders declined to 57 from 59 prior as the headline reading recorded its lowest value in 18 months. According to Chris Williamson of Markit,”Weaker rates of expansion were seen in services, manufacturing and construction in December, taking the overall pace of economic growth to the weakest for just over a year-and-a-half. The surveys suggest the economy grew by 0.5% in the fourth quarter, and the loss of momentum towards the year end will no doubt fuel worries that the upturn is too fragile to withstand higher interest rates.”

With December PMI data signaling a slowdown in activity across most of the G-7 universe, the focus will now shift to the US ISM Non-Manufacturing report due 15:00 GMT later today. The market expectations are for a slight pullback at 58.2 versus 59.3 the month prior. Any reading above 58 would suggest that the US economy continues to outperform its peers and should provide a boost to the buck as the day proceeds. However if the US ISM data confirms the overall slowdown in global activity USD/JPY could see fresh lows at 118.50 level during North American trade. For USD/JPY to rally to fresh highs the market needs to see that this is a bull market in dollar assets rather than just a bear market in its G-7 counterparts.

Boris Schlossberg
Managing Director

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