Weak PMI Data Knocks Euro For a Loop

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Market Drivers for October 24, 2013
Euro makes 2 year highs and then reverses as weak PMIs send it below 1.3800
Chinese Manufacturing PMI sees pick up in activity
Nikkei 0.42% Europe 0.30%
Oil $97/bbl
Gold $1336/oz.

Europe and Asia:
NZD Trade -199M vs. -730M
CNY Manufacturing PMI 50.9 vs. 50.5
EUR PMI Manufacturing 51.3 vs. 51.4
EUR PMI Services 50.9 vs. 52.3

North America:
USD Trade 8:30 AM
USD Weekly Jobless 8:30 AM
USD Flash PMI 9:00 AM

Euro set fresh two year highs in Asian session trade today, but was quickly knocked for a loop after Flash PMI from the region showed a surprising deceleration in activity. EUR/USD rose to a high of 1.3822 in late afternoon Asian dealing as better risk appetite and stop hunting around the 1.3800 figure helped to push the pair higher in thinner Tokyo trade.

However the pair quickly reversed course as flash PMI data from the EZ began to trickle out showing a slowdown particularly in the services sector. The flash PMI readings were generally weak across the board with French Manufacturing PMI slipping back below the key 50 boom/bust level to 49.4 from 50.3 eyed while French Services sector activity declined to 50.2 from 51.2 forecast. In Germany the manufacturing sector managed to remain relatively firm with Flash PMI readings printing at 51.5 versus 51.6 projected but the services component dropped sharply to 52.3 from 53.8 expected.

Overall, the PMI data in the EZ remained steady in the manufacturing sector at 51.3 versus 51.4 but tumbled in services to 50.9 from 52.3. This was the first monthly decline since March of 2012 and also the biggest miss of expectations since that time last year. The news suggests that the EZ recovery may be starting to stall and the recent appreciation of the currency may only exacerbate that trend.

Up to now the ECB has been remarkably nonchalant about the strengthening of the euro, but Mario Draghi may change his tone at the next month’s press conference if the central bank forecasts suggest the recovery is in danger of faltering. Many analysts have pointed out that part of the reason for euro’s strength has been the fact that the ECB has quietly but steadily shrunk its balance sheet while the other G-3 central banks continue to expand theirs. Therefore it will interesting to see if Mr. Draghi assumes a much more aggressively accommodative posture at the next month’s meeting.

The EUR/USD meanwhile tumbled below the 1.3800 barrier in the aftermath of the news release, but managed to find buyers ahead of the 1.3750 barrier and remained within striking distance of the 1.3800 level. The currency continues to show tremendous resilience in light of weaker economic data, but if tomorrow’s IFO shows a big drop in sentiment it may correct back towards the 1.3700 level by the week’s end.

Elsewhere, the only other report of note was the slight improvement in Chinese Manufacturing PMI which increased to 50.9 from 50.5. This was the third consecutive month of readings above the 50 boom/bust line and provided a modicum of relief to investors still rattled by yesterday’s news of sharp write down at Chinese banks. The Aussie initially rallied on the news, but has drifted lower as the European session wore on and was trading near the day’s lows as selling pressures on the unit still persist.

In North America today the eco calendar is relatively light with only Trade, jobless and new homes data on the docket. The news is likely to be skewed by the government shutdown impact and its difficult to say how the currency markets will react. For now modest dollar strength continues to operate in the market and that trend may accelerate as the day progresses.

Boris Schlossberg
Managing Director

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