Has Aussie Topped Out?

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Market Drivers for May 5 2014

Chinese PMI misses to downside

EZ PPI in line EU Commission feels region has turned the corner on growth

Nikkei closed Europe -1.16%

Oil $100/bbl

Gold $1311/oz.

Europe and Asia:

AUD Building Approvals -3.5% vs. 1.3%

CNY 48.1 vs. 48.4

EU Sentix 12.3 vs. 14.2


North America:

USD Final Services PMI 9:45 AM

USD ISM Services 10:00 AM

With Japanese and UK markets closed for a variety of holidays currency flows were muted in Asian and early European trade today, but weaker than expected Chinese PMI data took its toll on AUD/USD as the pair slipped to 9251 before finding some support.

The final Chinese PMI number printed at 48.1 versus 48.3 forecast. Both output and total new work numbers declined in April. Purchasing activity declined for the third straight month. The overall data suggested that the primary weakness came from domestic demand as decline in export orders were minimal.

The data reaffirmed the fact that the Chinese manufacturing sector has clearly slowed as the country tries to make the transition from mostly production driven growth to more consumer oriented expansion. On the plus side the PMI Services report posted over the weekend showed a modest uptick to 54.8 from 54.5 the month prior.

The slowdown in Chinese manufacturing demand appears to be significant long term trend and as such the news is likely to keep a cap on AUD/USD which saw some further selling pressure in Asian dealing today. The pair slipped to 9250 before bouncing slightly but may drift towards the 9200 later today if the RBA signals further displeasure with its recent appreciation. Given the secular slowdown in demand from China, the RBA would prefer to see AUD/USD closer to the 8500 level in order for the economy Down Under to rebalance itself. Therefore it is likely to keep jawboning although for now it will most likely maintain a steadfastly neutral stance.

Elsewhere, the EZ PPI data came in at -0.2% as expected as wholesale prices declined -1.6% on a year over year level. The European commission forecast that inflation in 2014 would slow to 0.8% from 1.3% in 2013 but would then rise to 1.2% in 2015. Meanwhile the economy is projected to grow to 1.2% in 2014 and 1.7% in 2015.

“The recovery has now taken hold. Deficits have declined, investment is rebounding and, importantly, the employment situation has started improving,” noted Siim Kallas the commission Vice President. Although the commission expressed concern about the strong euro it appears unlikely that EU authorities will move on the monetary front this week at the ECB meeting given the modest but nevertheless positive growth expectations.

In North America today the focus turns to the ISM Services report expected to rise to the 54.3 mark from 53.1 the month prior. The key story however continues to be the slide in US interest rates with benchmark 10 year now yielding 2.64%. The markets remain skeptical of US growth and more importantly of any action by the Fed despite relatively robust labor growth in last Friday’s NFP report. The decline in US rates has suppressed any rally attempts the greenback with USD/JPY reversing its post NFP 103.00 highs to trade below the 102.00 figure in this mornings London session. Unless US rates put together a sustained rally,USD/JPY appears to be destined to stay in the 102.00-103.00 range for the time being.

Boris Schlossberg
Managing Director

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