Market Drivers for September 23, 2014
Europe and Asia
CNY: Chinese PMI 50.5 vs. 50
EUR: EZ PMI Man. 50.5 vs. 50.6
EUR: EZ PMI Svc. 52.8 vs. 53.2
GBP: UK PSNB 10.9B vs. 10.3B
North America
USD: Flash PMI Manufacturing 9:45
The dollar was a tad weaker against most of the majors with the exception of sterling in early European dealing today amidst mixed economic data across the globe. In Asia, Chinese Manufacturing PMI surprised to the upside printing at 50.5 versus 50.0 eyed as it provided a boost for the beleaguered Aussie which tried to climb above the .8900 figure.
HSBC Manufacturing PMI rose to a two month high with Output, new orders and new export orders all increasing at a faster pace. The one sour note in the report was the decline in the employment component which continued to trend below the 50 boom/bust line. Nevertheless the overall readings provided a modicum of relief to investors who were worries that Chinese manufacturing sector was tipping into a recession. The steady state of activity suggests that Chinese demand is not deteriorating and that was welcome news to the Aussie which popped on the news through the .8900 figure.
The Australian dollar has been under relentless assault over the past several weeks as the pair broke one support level after another. One reason for its weakness was the fear of a material slowdown in Chinese manufacturing activity. However, today's news allayed some of those concerns and the pair was able to rally. For now, support for the Aussie lies at .8850 level, but sentiment against the pair remains high negative and it will likely find a fresh wave of selling should it rally towards the .9000 figure. Still, as we have been arguing for the past several days, the pair is grossly oversold and is due for a short-covering move.
Meanwhile in Europe, the EZ PMI data was mixed with German services component showing surprising strength as it rose to 55.4 versus 54.6 eyed, but the manufacturing report missed forecasts printing uncomfortably close to the 50 boom/bust line at 50.3 versus 51.3 expected. The sharper than expected decline in manufacturing suggests that Europe's largest economy is going to see anemic growth in H2 of this year. Whether this forces the ECB to begin its QE program remains to be seen, but demand in Europe has clearly flatlined and the central bank will need to act soon in order to stimulate growth.
The euro shrugged off the news and popped as short covering kicked in. The reaction is likely a symptom of the pair's oversold condition and investors were likely relieved that the news from the region was not worse. Still while the overall indices show that EZ region continues to expand albeit at a glacial pace, it is very vulnerable into tipping into a recession if demand does not pick up over next few months.
In the UK, the Public Sector Net Borrowing figures came in just a bit worse than expected, at 10.9B versus 10.3B eyed and cable was weaker in early morning London trade, dropping to 1.6300, but it too bounced as the morning progressed rallying to 1.6390 by mid morning dealing. The pair has corrected since the euphoria laden rally/post Scotland vote, as investors now weigh the long term ramifications of the event. Although the Kingdom has remained united, some investors fear that the fissures opened up by the Scottish referendum may take a long time to heal. In the meantime, growth in UK has slowed from the peak readings of earlier this year and that may keep the BoE on the sidelines for longer than the market anticipated.
In North America the calendar is quiet with only the Flash PMI manufacturing data due out at 13:45 GMT. If today's European action suggests anything its that the dollar rally is due for a pause and North America could continue the correction as the day proceeds.