Euro Turns Teflon as Market Bets on No Action from ECB

Market Drivers March 31, 2014
RBA stays on hold sees likely period of interest rate stability
UK PMI Manufacturing
Nikkei -.24% Europe .57%
Oil $101/bbl
Gold $1287/oz.

Europe and Asia:
AUD AIG Manufacturing 47.9 vs. 48.6
JPY Tankan 17 vs. 19
CNY Manufacturing PMI 50.3 vs. 50.1
EUR GE Unemployment -12K vs. -10K
EUR Final PMI 53 vs 53
GBP UK PMI Manufacturing 55.3 vs. 56.7

North America:
CAD PPI 8:30 AM
USD ISM Manufacturing 10:00 AM

Its been a mixed night of trade data wise and the price action in forex market reflected that fact as many of the G-10 currencies went their own way in relatively subdued Asian and early European sessions.

In Asia the news out of China showed that the official PMI Manufacturing gauge rose to 50.3 from 50.1 the month prior, but the HSBC measure remained below the 50 boom/bust line coming in at 48 versus 48.5 suggesting that the slowdown amongst the smaller manufacturers continues. Later on in the night the RBA statement essentially reaffirmed many of the familiar themes regarding the Australian economy, but the policymakers also noted that they see a likely period of interest rate stability indicating that the central bank is not going to even consider hiking interest rates in the foreseeable future.

The statement flipped the Aussie which ran through the 9300 ahead of the release, but then tumbled to 9254 on trader disappointment. The pair has had a very strong run over the past few weeks, as market concerns about the spillover effects on the Australian economy from the slowdown in China have eased greatly. But having gained more than 5 cents since its lows the pair may be due for a pause. The kiwi on the other hand, which is continuing to benefit from rate hike expectations, hit its best levels since 2011 as it broke above the 8700 barrier.

In Europe the euro improved marginally after slightly better than expected German unemployment data which saw jobless payrolls decline another -12K versus -10K eyed. The data from Eurozone's largest economy shows a slight slowdown in growth, but nevertheless expansionary conditions. Furthermore, the news from the news from the periphery continues to improve as both Spanish and Italian PMI data showed slight rises from the month prior as both remained firmly above the 50 boom/bust line.

The conditions in the EZ continue to muddy up the policy perspective. On the one hand inflation remains distressingly low at only 0.5% versus 2% ECB target. On the other hand economic activity continues to expand allowing ECB to delay any easing action. The market is now clearly doubtful that the central bank will do anything new at the next meeting this Thursday and the EUR/USD has responded in kind rising back to the 1.3800 level as shorts are forced to cover.

Finally in UK the PMI manufacturing report missed modestly printing at 55.3 versus 56.7 eyed. This was the lowest reading in 8 months as the high value of cable and some giveback in demand weighed on the results. Cable slipped slightly in response dropping below the 1.6650 mark, but the true test of the UK economy will come Thursday when the UK PMI Services report is released. If that data point disappoints, the rebound in the pound is likely to come to an end as traders adjust their expectations of BoE tightening.

In North America today the market will get a look at ISM Manufacturing report with consensus estimating a rise to 54.2 from 53.2 the month prior. If the data matches or beats the forecast, it will likely push the USD/JPY through the 103.50 level. The pair has proven to be very resilient lately as even the dovish speech by Janet Yellen could not bring it down for long and therefore any upside surprise from US data could carry it towards the 104.00 figure as the day progresses.