Dollar Drops At Start of New Year as Risk Flows Return

Last updated 1/4/2010 5:28 AM ET (GMT -5) 0 Comments - Add your comment

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Boris Schlossberg

Director of Currency Research, GFT

Top Stories

• Chinese PMI hits highest value (56.1) since survey began in 2004
• UK PMI blows past estimates at 54.1 vs. 52.1 eyed
• Equities higher accross the board in Asia and Europe on 1st trading day of the year
• OIl back above $80/bbl
• Gold holds $1100/oz.

Overnight Eco

• AUD AIG Manufacturing Index 48.5 vs. 51.5
• AUD Commodity Prices -16.6% vs. 24.4%
• CHF SVME PMI 54.6 vs. 57.1 eyed
• EUR Final Manufacturing PMI 51.6
• EUR Sentix Investor Confidence -3.7 vs. 3.4
• GBP Manufacturing PMI 54.1 vs. 52.1 forecast
• GBP Net Lending to Individuals 1.1B vs. 0.6B eyed
• GBP Mortgage Approvals 61K vs. 58K

Event Risk on Tap

• USD ISM Manufacturing PMI
• USD Construction Spending
• USD ISM Manufacturing Prices

Price Action

• USD/JPY trades very tight 40 point range around 93.00 as it consolidates last weeks gains
• AUD/USD finds support at 89.40 rebounding to 90.30 on risk flows but weak PMI data a concern
• GBP/USD corporate flows push it through 1.6150 and good PMI data drives it to 1.6200
• EUR/USD rebounds off 1.4270 lows as 1.4300 key pivot for now and 1.4400 caps

Strong manufacturing data from China and UK helped to reverse an early Asian session sell off in risk FX as currency markets saw further evidence of global economic recovery on the first trading day of the new year. Data for December showed that Chinese PMI rose to an all time high of 56.1 as export demand, new orders and employment subcomponents all surged. The only point of concern was the rise in prices to the fastest rate in 17 months, sparking fears of nascent inflationary pressures.

Nevertheless, as we noted earlier, “the news out of China signals that the recovery trade is alive and well as the Asian giant continues to be the key engine of global growth.” Chinese economic growth may be even more important in 2010 than in 2009, given the still tepid conditions in most of the G-20 economies. Having pulled the world from the brink of a global depression China will now need to maintain its near double digit growth to accrue further capital surpluses that will be crucial for US fiscal deficit financing. However, at least for now the recovery theme remains alive and well and should provide a modicum of support for risk FX after a strong selloff over the past several weeks.

The UK PMI data also proved to be much better than expected with the headline number printing at 54.1 versus 52.1 eyed marking a 25 month high for the index. The release was welcome news for cable bulls, providing the first clear piece of evidence that Q4 growth in UK should finally turn positive. UK economy has been the weakest link amongst the advanced industrialized nations with its GDP remaining negative through the third quarter of 2009. Today’s much better than expected PMI numbers along with a strong improvement in the housing markets (mortgage approvals rose to 61K from 57K the month) prior indicates that positive growth may have finally arrived in Q4 of 2009. Cable has been relatively resilient over the past several sessions having found support below the 1.6000 level and today’s strong economic data along with friendly corporate flows helped lift the unit above the 1.6200 handle by mid morning London trade.

Manufacturing data will remain the focus of the day in North American session as markets gear up for the US ISM PMI numbers at 15:00 GMT. Consensus estimates are calling for a print of 54.1 versus 53.6 in November and although the Chicago PMI data was revised downward on Thursday from 60.0 to 58.7, the expectation is that the national number should see a measure of improvement. If the data confirms market forecasts, the dollar should perform best against the yen most likely making another run at the 93.00 level as interest rate expectations expand. Having gained significantly across the board over the past month the greenback may be due for a pause at the start of this week as risk flows return to the market, but if the data continues to prove supportive dollar weakness will not last as the unit will start trading on growth expectations rather than yield.

FX Upcoming

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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.