Risk aversion reigned supreme in the FX market today and even the pound did not escape unscathed as the unit tumbled through the 1.6200 figure to hit a fresh 10 day low. Cable dropped to 1.6150 in early London trade after UK finances data showed record borrowing in the month of December. The euro meanwhile crept ever closer to the key 1.4000 figure after the EZ PMI Services data registered its first month over month decline in nearly a year.
In the Asian session today news that Chinese CPI data printed hotter than expected at 1.9% vs. 1.5% projected, sparked speculation that the PBOC may raise rates in Q1 of 2010 as inflationary pressures are clearly starting to build in the region. After remaining negative for nine months, Chinese CPI numbers rose to their highest level in more than a year registering their second consecutive monthly gain. As we noted earlier, “the idea of rate hikes from PBOC should not necessarily be bearish for the risk trade as it implies that growth in Asia Pacific region remains robust and should continue to help drive global recovery forward. However, the move to a more hawkish stance by Chinese monetary authorities comes at a time when growth in the Eurozone is beginning to cool.”
To that end today’s EZ data proved to be another disappointment as the services component dropped to 52.3 from 53.6 the month prior and much lower than the forecast of 54.1. Both Germany and France saw their numbers drop and although some analysts surmised that the weakness was partly due to the abnormally cold weather in the region, the data clearly suggests that consumer demand remains lackluster at best. On a positive note the Manufacturing component rose slightly to 52.0 from 51.6 the month prior and overall the indices remain in expansionary territory but the net takeaway from today’s reports is that growth in the region is stalling.
Meanwhile cable finally succumbed to profit taking as the latest data provided further support for the low rate scenario for the foreseeable future as M4 money supply contracted -1.1% and Mortgage Approvals slipped to 62K from 63K the month prior. The Public Sector Net Borrowing numbers were lower than expected at 15.7B vs. 18.6B eyed but were still the highest on record and only highlighted the extent of UK’ s fiscal problems.
In North American session today the market will get a look at the weekly jobless claims which took an unwelcome turn for the worse last week as they increased to 444K versus forecasts of 438K. Traders are looking for essentially the same print of 441K today indicating that they expect little improvement on the labor front. We believe the weekly numbers must consistently record a reading of 400K or less in order for sustainable job growth in US to materialize and until such trend establishes itself the Fed will remain accommodative on the monetary front.
Aside from the eco data which also includes LEI and Philly Fed reports, the key event risk today could come from President Obama’s speech on banking regulation. President Obama intends to limit bank’s trading activities as a way to reduce risk seeking behavior and equity markets may react negatively to such a proposal. If risk aversion accelerates into the US session, the EUR/USD which is already within striking distance of the level could test support at 1.4000 before the day’s end.
May The Force Be With You.
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