The Dollar's Move Raises Few Flags

by: Dean Popplewell

Looking for guidance to break the monotony of the current market apathy witnessed in the forex trading ranges appears near impossible under present circumstances. Asset class prices seem to be going through the motions with little investor enthusiasm. FX price ranges remain contained, with no reason to seek a breakout of substance any time soon. Even better Chinese manufacturing activity data presented overnight is delivered with a market warning, leaving investors again somewhat subdued in their response.

China's preliminary reading is the first economic data point from the world's second largest economy in Q3 and comes less than a week after another release showed that Chinese growth had picked up from a dip in Q2 – suggesting that their economy might have averted a so called "hard landing." The initial October reading for China's manufacturing activity came out at 50.9 compared with a final reading of 50.2 the previous month. Analysts note that the headline print was a seven-month high, again above 50 and in expansion territory.

The antipodean currencies - the AUD and the Kiwi - and their own countries global stock indices were probably the few net benefiters in the overnight session. China's upbeat reading thus far has done little to alleviate some of the other market fears associated with the Chinese economy; regional bourses have ended trading mostly on the back foot. Money market rates in China continue to remain elevated, reviving fears of a liquidity crunch witnessed last June. Data earlier this week showed a further increase in house prices, increasing investor concerns that Chinese authorities would be required to step in and cool down the market.

The "mighty" dollar has found fault with the possibility that any Fed tapering has been pushed further out the time curve. The 17-member single currency is showing no signs of being intimidated by its own private sector activity growing at a slower pace this month, suggesting that the euro-region's economic growth remains tentative as we enter Q4. Composite PMI data fell to 51.5 from 52.2 in September, just staying within expansion territory. Consensus had been expecting the measure to rally to 52.4 this month. Breaking it further down, service PMI fell to 50.9 from 52.2, while the PMI for manufacturing rose to 51.3 from 51.1. Looking at the euro region as a whole, analysts suggest that growth was finally becoming "more balanced" across the region.

The EUR bulls managed to drag the currency to hit fresh two-year highs above 1.38, as the EUR session began aided by China's flash manufacturing PMI data. However, the single currency has since managed to forgo some of it initial gains after the region's advance PMI readings were slightly disappointing. France's PMI Survey disappointed, with manufacturing staying in contraction for the 20th consecutive month. The session has also witnessed a pickup in JPY-cross demand for the most part, with USD/JPY continuing to flounder about its +200-day moving average of 97.32. It's still too early to say that the euro's recovery is losing momentum – that can be officially declared after a disappointing set of growth numbers (Q3 GDP is being presented on November 14th).

The prospect of stimulus withdrawal by the Fed temporarily ended the market talk of competitive devaluation and "currency war." The lack of "anything" to keep the market preoccupied has investors focusing on Fed tapering timing. The further out the time curve only encourages currency war banter – even more so now that the "mighty" dollar trades near a multi-year low against a plethora of major currencies. One does not have to look too far – listen to France; it's difficult for their politicians to hold their tongues around the EUR's strength. With little else to flap about, "currency war" rhetoric and copy is an easy stance.

The rest of the market will again be focusing on this week's soft September employment report and the uncertain outlook for the U.S. “government shutdown-hampered” October readings. Early conclusions have caused the market to push its tapering expectations well into Q1 2014 will not be favoring the "mighty" dollar anytime soon.

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