Some better news in North East Asia overnight, South Korean GDP came in better than expected and a distinct improvement on the prior number. In addition, Japanese manufacturing PMI was much stronger than forecast, and unlike the expected number was an improvement on the previous print. Perhaps signs of stabilisation? There’s no question that financial conditions have eased considerably from the tense situation that pulled the Federal Reserve back from the brink just a week ago. Indeed with the S&P 500 up well over 2% yesterday, and European bourses even stronger, the stresses afflicting the global asset markets are bleeding away. This is all no doubt related to Mario Draghi’s early Christmas present to the markets – his signalling that the ECB is contemplating an expansion of their quantitative easing programme.
Funnily enough, one of the reasons for the ECB to look into this has been the rather restrained performance of the Eurozone economy, Mr Draghi had better not look now, but the manufacturing PMI data coming out this morning for the Eurozone giants France and Germany almost belies the need for further extraordinary monetary policy! So far we have seen French data that was not only an improvement on last month’s number but also bucked the economist expectation of a weaker outcome. In Germany the picture was a bit more nuanced, with a better composite number masking slightly weaker manufacturing data, but much improved data from services. We’ll be getting a host of data from the Italians a little bit later this morning, which will give a fuller picture of just how the 3 largest Eurozone economies are doing, and the aggregate Eurozone PMI data coming out later will of course add to the overall picture.
I’m also waiting to see what the US manufacturing PMI data looks like this afternoon and the Baker Hughes Rig Count will give us a sense of how the US oil economy is faring in this new world of $50 oil. It’s just possible with all this good news popping through the cracks that talk of normalisation might pick up again more quickly than most expect. It doesn’t matter though.. there are 2 reasons why EUR/USD might fall (i) the dollar appreciates or (ii) the euro falls. Mario Draghi talking about extending QE is fuelling option (ii) and thus compared to yesterday’s open EUR/USD is 2% lower now. We haven’t seen comparable moves in EUR/USD since the peak of the late summer risk wobbles.
Does this mean that the continuation of the big dollar trend is at hand? I won’t embarrass myself by stating that right now. One big move doesn’t a trend make! Technically some interesting levels have been taken out, but nothing I would consider too significant. The level I am watching out for is 1.0808 in EUR/USD – the lows of the summer period. 1.51 is a rough equivalent for GBP/USD. Yet again it looks like equity markets are rallying into dollar strength. All of this has been happy news for emerging market currencies as well. Not a huge surprise as one would expect commodities to benefit from a dose of monetary largesse. Let’s see if this persists for a few days at least before we talk of new trends though…
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