Risk FX rebounded slightly at the start of week’s trade after a series of manufacturing PMI reports confirmed that economic activity in G-20 remained in expansionary mode. In Australia the AIG Manufacturing Index came in at 51.7 in France the final data showed a rise to 55.6, in Switzerland the SVME PMI registered a 54.0 reading and in Eurozone the manufacturing data posted a 50.7 print.
However the strongest reading of the night came from UK where the PMI data printed at 53.7 versus 50.1 eyed. It was the best performance of UK manufacturing sector in two years. Furthermore, all of the key the subcomponents showed healthy improvements as well with new orders, output and employment gauges all rising to fresh multi year highs The news bodes well for UK Q4 GDP data which should return to positive territory if these trends persist into the end of the year. Cable perked up after the report rising to 1.6400 against the buck and pushed EUR/GBP towards 9000 once again.
Despite the positive data overnight, sustainability of the recovery trade remains the key driver to further gains in high beta FX. As we noted earlier, “With recovery trade now priced to perfection growth in manufacturing sector will need to accelerate in order to maintain the upside momentum in risk assets. With current PMI readings relatively mixed and massive stimulus efforts such as cash-for clunkers programs behind us, manufacturing growth will need to depend on organic demand in order to sustain the risk trade going forward.
That is turn will be highly depended on the improvement in labor market conditions which is why the longer term direction of FX will be governed by US NFP data due at the end of this week. This week the market will likely turn all of its focus on the employment components of both ISM reports which tend to be relatively accurate predictors of the overall labor demand.”
Today’s key North American event risk will be the ISM Manufacturing survey. Markets forecast a rise to 53.1 from 52.6 the month earlier, and given the sharp increase in Chicago PMI data on Friday an upside surprise could be in order. However, the employment subcomponent will likely be as key as the headline number, and if does not confirm an improvement in labor conditions, the rebound in risk FX could quickly run out of steam.
May The Force Be With You.
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