USD/JPY Finds the Post FOMC Bid

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Market Drivers for August 22, 2013
Chinese PMI beats at 50.1 helping fuel Aussie through 9000
EZ Flash PMI better as well EUR/USD steady at 1.3350
Nikkei -0.44% Europe 1.21%
Oil $104/bbl
Gold $1363/oz.

Europe and Asia:
AUD Conference Board Leading Index -0.2% vs. 0.0%
JPY Japan Buying Foreign Bonds
JPY Japan Buying Foreign Stocks
JPY Machine Tool Orders
CHF Trade Balance 2.3B vs. 2.9B
EUR German PMI Manufacturing 52.0 vs. 51.1
EUR German PMI Services 52.4 vs. 51.7
EUR EZ PMI Manufacturing 51.3 vs. 50.9
EUR EZ PMI Services 51.0 vs. 50.2

North America:
USD Initial Jobless Claims 8:30
USD Markit US PMI 8:58
USD House Price Index 9:00
USD Leading Indicators 10:00
CAD Retail Sales 8:30

Better data out Asia and Europe helped Aussie and euro remain bid in morning European dealing today, while USD/JPY continued to gain traction in the wake of yesterday’s FOMC minutes which suggested that the Fed’s desire to taper QE continues on track.

In China the HSBC PMI printed at 50.1 versus 48.3 eyed – the first time it has moved above the 50 boom.bust line in 4 months. The news was particularly positive because the HSBC report is viewed by the market as more accurate than the official Chinese government report which comes out next week. The HSBC report is also more representative of the middle market companies rather than the big industrial concerns that comprise the government PMI data.

As such today’s PMI report showed a marked improvement in manufacturing activity especially on the domestic front. New Orders, Output and Backlog of Work all increased suggesting that demand may picking up once again which should stabilize growth in China.

The surprisingly strong Chinese PMI data had an immediate positive impact on AUD/USD which popped above the 9000 barrier and rose to a high of 9024 before running into some profit taking. Despite today’s rebound the Aussie remains inordinately weak with market sentiment still heavily skewed to the bearish side as the consensus view still holds that the slowdown in China will force the RBA to continue cutting rates for the foreseeable future. That’s why today’s rally may be temporary as scepticism continues to be dominant theme any time AUD/USD gains ground. The pair is unlikely to find any meaningful support until the economic situation in China shows sustainable evidence of growth.

Meanwhile in Europe, the EUR/USD held steady near the 1,3350 level after EU PMI data showed further improvement in both the Manufacturing and Services sectors . EZ PMI reading increased to 51.3 and 51.0 respectively as manufacturing held above the 50 line for the second month in a row while services just broke through into expansionary territory. This was the first time in more than 18 months that both indices were above the 50 boo/bust line and provided clearest evidence to date that the EZ economy is coming out of recession.

Although French data was weaker, German PMIs and the periphery economies continued to improve indicating that the pickup in demand may be expanding beyond the EZ’s largest economy. The EUR/USD held steady, popping above the 1.3350 in the aftermath of the release but then retreating slightly as the morning wore on.

The correction in high beta currencies is a reaction to yesterday’s FOMC minutes, which while somewhat mixed, still reaffirmed the Fed’s commitment to taper QE by the end of this year. The dollar continued to remain bid throughout the night with USD/JPY taking out the 98.50 barrier in late morning London trade.

Unless today’s US data which includes the weekly jobless claims and the Flash PMI readings, proves to be a massive disappointment, dollar strength is likely to continue. Having now relieved its bearish bias by taking out 98.50, USD/JPY looks ready to tackle 99..00 as the day progresses.

Boris Schlossberg
Managing Director

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