By
Marc Chandler
:
The unwinding of the recent risk-on plays continues today,
sparked by three factors.
First,another month with the Chinese PMI (HSBC flash) below the 50
boom/bust level at 47.8 (up marginally from the previous 47.6),
allows anxiety to continue to run high about the kind of landing
the world's second largest economy is having. Second, the euro zone
flash PMI was disappointing. Third, the well received Spanish 3-
and 10-year bond auctions today are seen as delaying what is now
thought of as nearly inevitable formal request foraid, and this
appears to be weighing on Spanish bond prices.
While we have generally been
anticipating the dollar to bottom
, we are not yet convinced this is it. So far the bounce is
marginal at best, barely approaching the minimum technical
retracements. We identified the Canadian dollar and the Australian
dollar as the most vulnerable, We remain impressed with the
resilience of the British pound, which is trading at pixel time
about a quarter of a cent below last week's closing price. The UK
retail sales and CBI industrial trends were in line with
expectations today or slightly stronger, but did not seem to prompt
much of a market reaction.
The euro area flash PMI is poor and the details even worse. The
continued weak data can only raise expectations that with the OMT
waiting for a formal request (hello, Mr. Rajoy?), the ECB will turn
its attention to the transmission mechanism, and deliver another
cut in the refi rate to 50 bp from 75 bp. The euro area September
flash composite came in at 45.9 from 46.3 in August. The German
data looked better with the manufacturing PMI risen to 47.3, a
six-month high and the service PMI bounced back above 50 to 50.6
from 48.3.
While there is no doubt that the German economy remains
generally resilient, the details were soft including new business
and staffing levels. France's report, on the other hand, was simply
dreadful. The flash manufacturing PMI fell to a 3.5-year low of
42.6 from 46.0. The service PMI fell to a 4-month low of 46.1 from
49.2. The details were even worse, with a decline in employment and
business expectations.
The euro, which was already trading heavily, though within last
Friday's trading range, broke down. Yesterday it briefly dipped
through the $1.30 level, and while it finished the North American
session above there, it did close below its 5-day moving average
for the first time since August 30.
A break of the $1.2900-20 area would strengthen ideas that
important top is in place.
The price action is broadly consistent with what we saw following
the announcement of QE2 back in November 2010, where the dollar
weakened initially and then recovered smartly.
The yen weakened after the BOJ's extension of its QE back
in April, but we argued at the time and still think it offers the
better explanation,that the yen's drop then was partly a function
of the risk-on that followed the second LTRO.
Even if the objective of the BOJ's moves yesterday were notdirected
simply at the yen's strength, Japanese officials must be
disappointed with the market reaction. The dollar is back to the
lower end of its range near JPY78 after having traded above JPY79
yesterday, albeit briefly.
If the risk-off forces gain the upper hand here, the yen
may strengthen further, not just against the dollar, but against
the euro and other crosses as well.
Japan did report a slightly smaller than expected trade deficit for
the month of August, but on a seasonally adjusted basis was worse
than expected and about a quarter larger than the July deficit. Of
particular note, exports fell 5.8% on a year-over-year basis, the
third consecutive decline. Lower oil prices helped imports decline
the most in 2.5 years (-5.4%).
Exports to China and the EU are off a little more than 28% on a
year-over-year basis. Exports to the US are up 10.3%. The data
increases the risk that the Japanese economy is contracting here in
the July-September quarter. Separately, note that Japan's flow of
funds report showed that foreign holdings of JGBs reached a record
high in Q2 and, at JPY8 trillion, account for 8.7% of the
outstanding JGBs.
Disclosure:
I have no positions in any stocks mentioned, and no plans to
initiate any positions within the next 72 hours. I wrote this
article myself, and it expresses my own opinions. I am not
receiving compensation for it. I have no business relationship with
any company whose stock is mentioned in this article.
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