Global Manufacturing Supports the Risk Trade But For How Long?

Last updated 11/2/2009 4:31 AM EST (GMT -5) 0 Comments - Add your comment

Boris Schlossberg

Director of Currency Research, GFT

As trading kicked off for the week risk appetite rebounded with EUR/USD and AUD/USD& nbsp;gaining more than 70 points at the start of European trade. Part of the boost came from continued expansionary readings in global PMI manufacturing surveys all of which printed firmly above the 50 boom/bust line.

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. While economic activity in the G-20 manufacturing sector has clearly recovered from its multi year lows set earlier in the year, the latest data suggests a pause rather than an acceleration of demand. For example in Australia and Switzerland the PMI indices actually declined from their readings the month prior while in Eurozone the PMI data remained unchanged.

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. Later on today, the market will get a glimpse at the UK and US Manufacturing results which shed further light on the recovery thesis, but 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. Note that on Friday, risk assets sold off sharply despite much a better reading in Chicago PMI when it was revealed that the employment subcomponent actually declined.

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About The Author

Boris Schlossberg began his Wall Street trading career more than 20 years ago at Drexel Burhnam Lambert. There, he traded nearly every type of financial product on the market in the U.S., from equities and options to stock index futures and foreign exchange. His innate ability to analyze market information and use it to trade has helped him become an industry-recognized, “go to” trading professional.

These days, whenever the markets move, many organizations turn to Schlossberg for his take on the situation. He is a weekly contributor to CNBC's Squawk Box and a regular commentator for Bloomberg radio and television. His daily currency research is widely quoted by Reuters, Dow Jones and Agence France Presse newswires and appears in numerous newspapers worldwide. Schlossberg has written for publications like SFO magazine, Active Trader and Technical Analysis of Stocks and Commodities. He is also the author of Technical Analysis of the Currency Market and the co-author of Millionaire Traders: How Everyday People Are Beating Wall Street at Its Own Game with Kathy Lien. He joined GFT in 2008.