Risk FX Finds a Bottom in London Trade

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Market Drivers for February 4, 2014
UK PMI Construction at highest levels since record began
RBA removes easing bias sending AUD to 8900
Nikkei -4.18% Europe -.20%
Oil $97/bbl
Gold $1256/oz.

Europe and Asia:
AU RBA removes easing bias
GBP PMI Construction 64.6 vs. 61.6
EUR PPI 0.2% vs. 0.3% eyed

North America:
USD Factory Orders 10:00 AM
USD Consumer Sentiment 10:00 AM

After a very turbulent Asian session that saw the Nikkei drop by -4.18%, financial markets settled down in European session and risk currencies caught a bid buoyed by hawkish statement from the RBA, record high PMI numbers from UK and slightly improving PPI data out of Eurozone.

In Australia the RBA surprised the markets with relatively hawkish statement as it removed its easing bias from the communique and made no further comments about the strength of the currency. The RBA concluded its statement with, “On present indications, the most prudent course is likely to be a period of stability in interest rates,” clearly suggesting that it has now moved to a neutral bias and that further rate cuts are unlikely for the foreseeable future.

The RBA was likely surprised by the uptick in inflation noting,”inflation is expected to be somewhat higher than forecast three months ago, but still consistent with the (2% to 3%) target over the next two years.” The rise in inflation along with its forecast that growth should strengthen as the year progresses suggests that the current easing cycle has come to an end and that rates will remain stationary for long period of time.

The Aussie popped on the news, as shorts scrambled to cover their positions and the pair rose to a high of 8915 before receding a bit. The pair could see further upside as sentiment changes and could challenge the 9000 barrier as the week progresses.

Cable also finally found some steady ground after several days of relentless selling. The UK PMI Construction report printed at 64.6 versus 61.6 – the highest reading since records began in 2008. Although Construction is the smallest sector to be measured by PMI reports it nevertheless confirms that UK economy continues to perform well and if tomorrow’s PMI Services report which measures activity in the largest most important sector, beats the forecast, cable’s rebound could extend significantly. For the time being the pair is capped at 1.6350 and needs to overcome that barrier in order to establish a more bullish bias.

The euro meanwhile was the quietest of them all trading either side of the 1.3500 barrier with most of the price action coming from flow on the crosses. The EZ PPI data printed slightly below estimates at 0.2% versus 0.3% eyed but nevertheless was better than the -0.1% reading the month prior and eased some of the concerns about deflation in the region. The news may allow the ECB more time to consider its options instead of forcing the authorities to ease policy now. As such it may provide a small boost for the euro with the pair rebounding to 1.3550- 1.3600 ahead of the meeting this Thursday.

With no meaningful US economic data on the docket the price action is likely to be driven by equities today and if US stocks stage a rebound after several days of panicked selling USD/JPY could stage a rebound towards the 102.00 barrier. The pair has been badly battered by yesterday’s surprisingly weak US ISM manufacturing number but has managed to stay above the 101.00 mark throughout the night despite big selloff in Asian markets. The price action suggests that the correction may have found a near term bottom and USD/JPY could rebound on any minor positive catalyst in North American trade.

Boris Schlossberg
Managing Director

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