The U.S. dollar is consolidating its recent gains with a most unlikely backdrop. European data was much weaker than expected. The Greek parliament vote on reforms and the 2013 budget look like cliff hangers. With national polls pointing to a statistical dead heat, the U.S. presidential election is thought to be coming down to the wire. Legal maneuverings are already underway. The ECB and BOE meetings are less than 48 hours away.
Perhaps it was the less dovish than expected Reserve Bank of Australia that got the ball rolling. It left its official cash rate unchanged at 3.25% and noted that the news from China was less bad. While the Australian dollar has rallied to new 5-6 week highs, the option barrier thought to be struck at $1.0450 remains intact. The recent retail sales and trade reports were somewhat better than expected, but a bigger challenge may lie with the jobs report on Thursday and the monetary policy statement on Friday, which could see the growth profile revised down.
However, one couldn't imagine a poorer set of numbers from Europe. The eurozone service PMI was weaker than the flash report suggests, German manufacturing orders collapsed and U.K. industrial output fell three-times more than expected.
The final euro area non-manufacturing PMI of 46.0 compares with a 46.2 flash and 46.1 September reading. Markit says this is consistent with a 0.5% contraction in GDP. Ironically, the periphery, like Ireland, Spain and Italy showed a bit of improvement. The disappointment was with Germany and France. Germany came in at 48.4 from 49.3 in the flash and 49.7 in September. France stands at 44.6 from 46.2 in the flash and 45.0 in September.
Separately Germany reported manufacturing orders in September slumped 3.3% on the month. The consensus called for a 0.5% decline on top of the 0.8% fall in August. This warns of risk to the downside when industrial output figures are released tomorrow. The consensus calls for a 0.7% decline.
Initially in Asia, the euro's recent losses were extended, but the optionality reportedly struck at $1.2750, just ahead of retracement objectives near $1.2740, remained intact and it is off this that the euro bounced. The $1.2820-40 area poses the immediate technical obstacle. A move and ideally a close above this band is needed to begin repairing the technical damage inflict to the euro in recent days.
While the poor economic news from the area is unlikely to spur the ECB into action at Thursday's meeting, the same cannot be said for the U.K. The 1.7% slide in September industrial output was three times more than the market expected and brings the year-over-year rate to -2.6% from -1.0% in August. Manufacturing did eke out a small gain, 0.1%, which was a third of the rise expected and pales in comparison to the 1.2% drop in August.
The data does not necessarily mean that BOE will announce a new set of gilt purchases. Both deputies at the BOE have expressed some skepticism about the effectiveness of such purchases going forward. However, until a formal evaluation of the funding-for-lending scheme is conducted (a month off still), a modest new gilt purchase program (~GBP25 bln) is possible. As QE has hardly weighed on sterling, we do not expect much of a market reaction one way or the other on Thursday, suspecting instead, sterling's performance will be part of the larger market move after the U.S. election and the first part of the Greek vote.
Sterling has yet to resurface above $1.60. The $1.6030-40 area poses even more formidable technical resistance. At the same time, the late-October low near $1.5915 also looks fairly safe at this juncture.
Lastly, the yen itself is largely sidelined. The dollar initially dipped below JPY80, but ever so briefly and ever so shallowly, and new dollar buying quickly was seen, lifting the greenback to the JPY80.30 area, which it continues to flirt with. The yen has been sold on the crosses. The euro held JPY102 and has staged what appears to be a reversal. A move above JPY103 may spur a move to JPY104 in quick order.