Euro Soars, Aussie Sinks on Tale of Two PMIs

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Market Drivers for January 23, 2014
China HSBC PMI sinks below 50 driving Aussie down
German PMI hits 32 month high EURUSD pushes through 3600
Nikkei -0.79% Europe -0.07%
Oil $97/bbl
Gold $1237/oz.

Europe and Asia:
CNY HSBC PMI 49.6 vs. 50.6 eyed
EUR PMI 53.9 vs. 53.2

North America:
CAD Retail Sales at 8:30 AM
USD Weekly jobless 8:30 AM
USD Flash PMI 9:00 AM
USD Existing Homes 10:00 AM

It was a tale of two PMIs in the currency market tonight as the data from China disappointed sending Aussie through the 8800 support while data out of Europe was much more upbeat propelling EUR/USD higher by more than 100 points to 1.3650 by mid morning London dealing.

In Asia the HSBC Flash PMI reading came in at 49.6 – markedly worse than the 50.6 eyed. It was the first time that PMI dipped below the boom/bust 50 level since July of last year indicating that economic conditions in China are starting to slow materially. The Aussie reacted immediately to the news dropping to a low 8777 as traders feared further slowdown in Australian economy from waning demand out of China.

The RBA now finds itself in the most uncomfortable of policy choices. The central bank would like to see Aussie weaken further towards the 8500 level to rebalance the country’s terms of trade and make exports more competitive, but it must now face the prospect of inflationary pressures as rise in import costs and government spending have pushed the CPI well above expectations.Given the central bank’s dovish bias the Australian monetary authorities may ignore the bump in the CPI measures and continue to consider possible rate cuts as the year proceeds. The Aussie meanwhile remains mired near its yearly lows and may test the key 8750 support before the week ends.

In Europe the economic picture was diametrically opposite to that of Asia. The flash PMI readings from both Germany and France showed an improvement with the exception of slight miss of German PMI services report. France which has been a horrid laggard and a drag on Eurozone growth finally saw an uptick in activity. Although both PMI remained below the key 50 reading, French Manufacturing PMI rose to 48.8 from 47.6 the month prior while Services increased to 48.6 from 48.2. Sentiment may have improved after President Hollande changed his rhetoric this month to assume a more business friendly posture.

Meanwhile in Germany private business conditions rose to a 31 month high as PMI Manufacturing hit 56.3 versus 54.7 eyed while services registered a reading of 53.6. The strong man of Europe continues to massively outperform the rest of the region and is carrying the EUR/USD on it shoulders as the pair rose to within a few points of the key 1.3650 level in response to the positive data.

If Eurozone continues to generate organic growth as the year proceeds, the need for further accommodation from ECB will decline sharply and the euro could see further strength, challenging the yearly highs at 1.3800 in the foreseeable future.

In North America today, PMI readings will also be the focus of attention as markets get a glimpse at the flash manufacturing data PMI due at 1400 GMT. The expectation is for slight increase to 55.2 from 54.4. If the data does meet or beat consensus it could add to the overall positive risk sentiment in the markets and could push both EUR/USD and USD/JPY higher with EUR/JPY eyeing 143.00 level as the day progresses.

Boris Schlossberg
Managing Director

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