TRADERS´ Blogs

Aussie appeal

Last night’s decision by the RBA to leave rates on hold has contributed still further to the enduring appeal of the Aussie, which rapidly jumped above 1.04 after the announcement. Short term, there is still much to like about the AUD. Cash rates at 3.25% remain well above those of the major economies. With inflation in the middle of the RBA’s 2-3% band, and the economy still recording respectable growth, nominal GDP growth down under is around 5%, which again is considerably higher than other major advanced economies. Providing the Aussie with some additional impetus has been the improvement in recovery prospects in both America and China. Later this week, China releases a barrage of fresh economic data, including industrial production, exports and money supply, with the expectation that it will show a firmer economic picture.

It just gets worse for Europe

Some more disturbing economic news out of Europe this morning. In both Germany and France, the services PMI for October recorded yet another significant decline. In addition, the composite PMI for France remains extremely weak at 43.5, implying that the French economy is in recession. For the whole of the eurozone, the composite PMI fell further to 45.7, a very weak reading indeed. The single currency still looks offered, currently trading at 1.2775. Rajoy’s ongoing prevarication regarding a bailout application for Spain remains troubling for the euro, as does the prospect of some rebellion by coalition members when the Greek Parliament considers the latest austerity and reform package tomorrow. Euro bears might be more aggressive, were they not conscious that an Obama victory tonight might trigger some profit-taking by dollar longs.
Michael Derks, Chief Strategist

Data/Event Risks

• USD: Latest polls suggest that President Obama will be re-elected today. Results are expected early Wednesday morning (London time).   
• EUR: Services PMI data out today from Europe’s economic heavyweights. Weak outcomes relative to expectation will perpetuate the contrast between an improving America and a faltering Europe, in turn weighing on the euro.    
• GBP: Industrial production at 09:30, followed by NIESR GDP estimate at 15:00. Recent growth news out of UK has been mildly encouraging – expect GBP to further outperform euro should today’s growth news provide an upside surprise.       

The euro has finally traded through the bottom end of the 1.28-1.32 range that has contained the single currency since just prior to the Fed’s QE3 commitment in the middle of September. In response, many traders are warming to the prospect that the euro may be headed much lower in coming weeks. Technically, the single currency is now below some critical levels (the 50d and 200d moving averages), and it looks very soft on key crosses (for example, EUR/AUD fell below 1.2350 this morning). Peripheral bond yields have continued to widen today, partially in response to uncertainty around how the Greek Parliament will vote later this week when it considers the troika’s latest austerity and reform package. This morning’s Spanish labour market figures out of Spain were a further reminder that the economy is in desperate trouble.

Data/Event Risks

• USD: Non-manufacturing ISM is the only major release today – if above expectations, the dollar may climb further. Focus will also be on presidential election – latest polls confirm a very tight race, although super-storm Sandy seems to have given Obama a minor boost.   
• EUR: Spanish unemployment is the only major release out today, ahead of a myriad of services PMI figures for the eurozone tomorrow. The former will confirm that the Spanish labour market remains dire, and as such could weigh on the single currency.   
• GBP: Only PMI Services to watch today. Cable still stuck in a range, despite the wobbly euro, but looks likely to break lower before too long.   

Data/Event Risks

• USD: Payrolls is the main focus today – market expects a 125K increase. Traders seem positioned neutral for this one, so will need a big deviation from consensus to move the dial on the dollar.   
• EUR: Prior to payrolls, the manufacturing PMIs for Europe’s big economic heavyweights are released. All are expected to remain well below 50. 
• GBP: The construction PMI carries some weight in the UK – if above 50 today then this should assist sterling.    

Data/Event Risks

• USD: The first read of Q3 GDP and Michigan confidence data. The market looks for annualised growth of 1.8%. Stronger data would help the dollar, but only modestly so. Focus remains on labour market so strong data not likely to change Fed’s stance on policy.
• EUR: Focus on Italy, but not likely to rock the euro. Business confidence together with sales of index-linked and zero-coupon bonds.