[B]Talking Points
• Japanese Yen: weaker Nikkei helps yen
• Australian Dollar: Trade deficit expands sharply as strong AUD weighs
• Euro: PMI Manufacturing surprisingly strong
• Pound: Manufacturing softens substantially
• US Dollar: ISM Manufacturing on tap[/B]
EURUSD made a half hearted attempt at a rebound in early London trade this morning, but despite the better then expected PMI Manufacturing numbers the pair could not hold the 1.4700 level and tumbled sharply for rest of the European session. The PMI data from the Eurozone proved surprisingly strong as the overall index climbed to 52.8 from 52.6 the month prior boosted by new orders from France and Germany. For the time being it appears that the higher euro is having little negative impact on demand for European goods.
However, the problem in the EZ does not rest with the manufacturing, but rather with services. The credit crunch that has affected global capital markets since August is exerting a particularly steep toll on EZ service sector where activity is expected to decelerate significantly. One piece of evidence to support that view was the woeful reading in German Retail Sales last week which dropped –3.3% on a month over month basis. As we noted in our weekly, “The fact of the matter is that European economy appears to be bifurcated, with producers continuing to do well, but consumers lagging badly. Under such circumstances the ECB is likely to remain sidelined for the time being.”
Today, the FX market will also get a good view of the US manufacturing conditions. The ISM Manufacturing data is expected to print at 50.5 – lower than the month prior and only a shade above the key 50 boom/bust level. If however, the lower dollar helps to spur export demand – as many dollar bulls argue - the potential for an upside surprise is quite real and may boost dollar demand for rest of the day. After rejecting the 1.5000 level last week the EURUSD now appears to be in a consolidation phase and as we argue in our weekly report the next direction in the pair will likely be governed by the ECB statement on Thursday and the NFP data this Friday.
Meanwhile in Asia the Aussie sold off on news of much wider than expected trade deficit which expanded to a record gap of -1,008M versus –298M forecast. The higher exchange rates in AUDUSD are clearly skewing the flows in favor of imports and should the situation continue it may exacerbate the balance sheet position for the Australia and ultimately slow economic growth. For now however, economic demand in Australia remains firm although tonight’s news of a slip in company profits to –2.1% from 2.0% expected could be cause for concern about the long term viability of record high Aussie. The RBA, which meets this Tuesday, is expected to leave rates on hold which should have minimal impact on the pair unless the central bank chooses to issue a forward guiding statement but we are skeptical that RBA officials will want to fan the fires of further speculative demand.
