EUR/USD made a move below local support, supposedly triggered by terrible Spanish employment data as the negative EU story gains momentum again. But the broader USD picture awaits the US election result.
Services PMI’s around the world
Despite the meltdown late in the US on Friday, the Asian session on Monday failed to follow through with particularly steep losses (I’m losing count of how many times we fail to see a consistent transmission of market moves around the world lately) as the Chinese Services PMI official survey was out at a healthy 55.5 and the HSBC survey showed a slightly less robust 53.5, which was also weaker than the previous 54.3.
Remember that the official government transition period in China begins later this week even if plenty has been going on behind doors in recent months. The official numbers here would seem to be worth taking with an even larger grain of salt than usual. And while on that note, the rumour mill is working overtime on the difficulties the leadership handover is proving to be at this challenging time for the Chinese economy.
In Europe, the services PMI’s are up tomorrow for most EU countries, though Sweden did report today (positive number) and the argument that the UK data bump was merely a symptom of the hosting of the London Olympic games gained traction today as the October UK Services PMI reading was worse than expected and perilously close to contraction and a multi-year low.
This had GBP/USD on the skids today. The US data point held no surprises, coming in slightly below last month’s and very marginally worse than expected. It was interesting to note the marked weakness in the New Export Orders sub-index, however.
Resilient Aussie – watch out for the RBA
The Australian dollar obviously had both eyes on the Chinese PMI data and perhaps as well on the surge in the major mining equities in Australia which also may be a bet on a resurgent China, but offsetting this were the rather large sell-off in equities on Friday and the rather chunky sell-off in metals prices Friday as well. There was marginally positive Australian data out overnight, but it hardly shifted the rate curve at the front end of the curve, and the RBA is on tap tonight, with a 25-bp cut to bring the cash target to 3.00% expected.
Beyond that, a little under 50 bps of easing is priced in for the year forward, so we’ll have to leave it to guidance from the RBA. In general, the aussie has been spectacularly resilient as it appears the market is using the weak Euro as an excuse to rebuild short EUR/AUD positions rather than to merely deleverage (which one would imaginge would have been AUD negative across the board).
Looking ahead
Hopefully, my post earlier today on the break in EUR/USD makes the critical point here – that a break is a break (in EUR/USD) until proven otherwise and that a break that happens before the event risk is a tough one to stomach or know what to do with (see that article for examples of when breaks have occurred historically during holidays (2006) and before presidential elections (2004). The next 48 hours in the US will likely either see the market either rejecting this move as a head-fake or we will see it deepen into a full scale sell-off.
The JPY reversal here has gotten downright brutal as it appears the market got ahead of itself in selling the JPY recently – particularly against the euro and sterling, but it’s very hard to stomach a strong AUD and strong JPY at the same time – one of those move is “wrong.” The next two days are likely to tell us which one.
My read of the election is the same as for the oddsmakers – that we should be leaning to an Obama victory, but that we should by no means be certain. The Ohio result is considered crucial and appears in Obama’s hands. Ohio looms very large even in the event Romney takes Florida.
Stay careful out there.
Economic Data Highlights
- China October Non-manufacturing PMI out at 55.5 vs. 53.7 in September
- Australia October AiG Performance of Services Indutries out at 42.8 vs. 41.9 in September
- Australia September Trade Balance out at -1456M vs. -1550M expected and -1876M in Aug.
- Australia September Retail Sales out at +0.5% MoM vs. +0.4% expected
- China October HSBC Services PMI out at 53.5 vs. 54.3 in September
- Sweden October Services PMI out at 50.3 vs. 47.2 in September
- Spain October Unemployment Change out at +128k vs. +110k expected and +79.6k in September
- UK October Services PMI out at 50.6 vs. 52.0 expected and 52.2 in September
- Canada September Building Permits out at -13.2% MoM vs. -3.0% expected
- US October ISM Non-manufacturing out at 54.2 vs. 54.5 expected and 55.1 in September
- New Zealand Q3 Average Hourly Earnings (2145)
- UK October BRC Sales Like-for-Like (0001)
- Australia Q3 House Price Index (0030)
- US Fed’s Williams to Speak on Monetary Policy (0100)
- Australia RBA Cash Target (0330)