Strong data lifts outlook for the U.S

USD

 The dollar traded overall slightly higher on Thursday after better-than-expected Manufacturing data lowered the risk of the Fed instituting another round of quantitative easing (QE). Manufacturing ISM in November showed a rise to 52.7 vs 51.8 expected and 50.8 in the previous month. It was the largest increase in 5 months. The explanation for the rise was lower raw material costs and an increase in new orders. The dollar strengthened 50 pips against the Australian dollar after the announcement although it fell versus the euro which gained on the improvement in risk appetite. Other data out on Thursday showed a rise in unemployment, with Initial Jobless Claims above estimates at 402k vs 390k; and Continuing Claims at 3740k vs 3650k expected. Tomorrow's Non-Farm Payrolls, however, may have more effect on the exchange rate. Figures showed an encouraging rise in Construction Spending, which rose to 0.8% versus the 0.3% expected.

EUR

 The euro rose on Thursday as the effects of the central bank credit-easing operations continued on Wednesday lingered on a day and helped support risk-on. The single currency was also buoyed by the news that both a Spanish and a French bond auction had generated more demand than expected, and in the case of the French auction yields actually fell from 3.22% on the 10-year in November's auction to 3.18% at the auction on Thursday. The 15-year fell from 3.77% to 3.65%. Spanish yields, however rose with 3-year bond yields rising to 5.187% versus 3.639% in the previous auction. Nevertheless they were both seen as a success. Despite that France was dogged by threats from credit rating's agencies that it might lose its AAA rating, and on the data front French PMI fell to 47.3 vs 47.6 whilst Euro-zone PMI remained unchanged at 46.4. French Unemployment Rate remained steady at 9.7%. There is now considerable speculation that the ECB will lower its interest rates in December's meeting and Friday's Producer Price Index data will be closely followed for indications that might support this proposition.

GBP

The pound was flat on Thursday after the release of disappointing Manufacturing data renewed the gloomy economic outlook for the U.K. Manufacturing PMI for November contracted for the second month running, falling to 47.60 vs the 47.80 in the previous month. Admittedly the result was better than the expected drop to 47.00 but analysts interpreted it as negative, which weakened sterling, especially against the euro. Overall risk appetite remained quite strong as bond auctions in France and Spain were seen as a success – mainly due to the high demand generated. Nevertheless the poor follow through from Wednesday's spike higher left markets in doubt as to whether the move would persist or whether negative sentiment and the euro-zone's seemingly intractable problems would once again lead to renewed bout of panic selling in riskier currencies.

JPY

The yen continued to trade quite flat against most currencies as market sentiment remained robust despite creeping euro-zone concerns undermining the recent spike in riskier currency pairs after central bank swap rates were discounted on Wednesday. The slowdown in the Chinese economy revealed by a lower than expected Manufacturing PMI of 49.0 vs 49.9 expected, failed to lead to a substantial rise in yen haven demand, although there is now considerable speculation that the Japanese authorities have been intervening in small tactical operations for several weeks now and the currency may be misrepresented. Later this evening several sets of data are expected, including Capital Spending in the 3rd quarter, which is expected to fall at a slower pace of -3.6% than it did in the previous quarter of -7.8% and Capital Spending Excluding Software, also in the 3rd quarter, which fell by -3.0% compared to the -8.2% in the previous quarter. The Monetary Base in November will also be released this evening at 23.30; it rose by 17.0% in the previous month.