As a new month dawns, investors are comforted by signs of life in China’s economy. The rise in both the official and private HSBC PMI indices was enough to reassure investors that the intended slowing in Chinese activity has not gathered unwarranted momentum. As the news sets in, equity investors’ recent poor fortunes have been reversed. The almost audible sigh of relief has ignited a rally in risk assets and sent the euro to a two-week high as it bypasses $1.2800 seemingly without thinking.
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Aussie dollar – The biggest gains of the session belong to the Australian dollar as investors received doubly good news. The rise in the official PMI for August in China from 51.2 to 51.7 was a huge sigh of relief for Australia’s bulls given the nation’s trade exposure to the region. Separately the HSBC PMI survey returned once again to expansionary territory after a tussle with contraction in July where it read 49.4. The rise to 51.9 for August is most welcome.
But the news was accompanied by a reminder of what China means to its domestic economy as second quarter GDP data showed a 1.2% gain for the three months ending June leaving growth 3.3% above the same point a year ago. The Aussie dollar took off like a rocket and shot to an intraday peak at 90.60 U.S. cents and its best performance in nearly two weeks. The unit stood two cents weaker just 24 hours ago indicating the real surprise in today’s data. On a less positive note Australia’s own PMI data slowed to 51.5 from 54.4 in July as the effects of China’s policies aimed at cooling its pace of growth came into effect. The Aussie also rose sharply against the Japanese currency to ¥76.04 this morning.
Japanese yen – The yen eased overnight to ¥84.58 before news broke that Mr. Ozawa wants to fight Prime Minister Naoto Kan for party leadership. Mr. Ozawa is running on a campaign promise of intervening in the foreign exchange markets to weaken the yen in order to restore dignity to the nation’s manufacturers. Although a less popular politician with the public, Mr. Ozawa has the potential to carry some political clout in shaking up the weak fabric of the ruling Japanese party. The Nikkei touched a 16-month low earlier in the day before Chinese data and Mr. Ozawa’s filing for candidacy propelled significant intraday gains. The yen is once again strengthening and rose to beneath ¥84.00 in New York.
U.S. Dollar – The dollar index is weaker by 0.7% this morning as a 1% rise in the euro pushed the dollar’s appeal as safe harbor off the table. The dollar is also softer in response to the contents of minutes released yesterday disclosing the line of thinking at the FOMC August 10 meeting. The meeting showed that policymakers were prepared to act further because weakening activity and a shrinking of the Fed’s balance sheet were an unwarranted mix. However, the Fed’s core view remains that 2011 already contains growth seeds that will flourish in the event of no further economic shocks. Fears remain that shocks could significantly alter to the downside both growth and inflation. The FOMC now has to weigh up whether or not the costs of further quantitative easing outweigh the benefits of doing so.
Euro – The euro surged against the dollar in early New York trading to reach $1.2815, its best level in almost two weeks. The single currency was firstly buoyed by Asian market data and a round of equity index increases. But the mood was sealed by evidence that core manufacturing activity remained on a robust footing during August. The Eurozone manufacturing PMI increased to 55.1 during the month while Germany’s expansion remained intact at a robust reading of 58.2. French PMI expanded further to 55.1 and exceeded forecast. To a large extent, today’s data confounds the view that activity on the other side of the Atlantic is dulling activity in Europe. Some of today’s surging euro is likely the work of shorts being ejected from the ring.
British pound – The pound remains down on its luck as domestic manufacturing activity failed to maintain a similar degree of traction as was shown on the continent. The pace of expansion came in significantly from a reading of 57.3 in July to 54.3 in August. The pound was able to gain on account of the risk rally ahead of the data reaching $1.5418 while post data release pared gains and is trading at $1.5404. Against the euro the pound also yielded ground falling per euro to 83.08 pence.
Canadian dollar – The Canadian dollar is up but hardly as much as its Australian commodity cousin. The risk rally today is focused on Asia and has little to do with any change in the fortunes of North America. The Canadian dollar improved 0.8% to buy 94.36 U.S. cents today having fallen yesterday to its weakest in seven weeks.
Andrew Wilkinson is a Senior Market Analyst at Interactive Brokers LLC
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