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FOREX: US Dollar Extends Rally as Stocks Slump, ISM Report in Focus

By , Currency Strategist
01 November 2011 08:33 GMT

Talking Points

  • US Dollar Soars on Safety Demand as Asian Shares Follow Wall St Lower
  • Australian Dollar Slumps on Risk Aversion, RBA Interest Rate Decrease
  • UK GDP, PMI Data to Show Weakness, Reinforcing Case for QE Reboot
  • ISM Report Key as Markets Gauge Risk Implications of Firming US Data

The US Dollar pushed higher for a second day overnight, adding as much as 0.6 percent on average against its leading counterparts, as a slump across Asian stock exchanges drove safe-haven demand for the benchmark currency. The MSCI Asia Pacific regional equity index fell 1.9 percent, following Wall Street lower on news that Greek Prime Minister George Papandreou will put the new EU debt crisis containment plan announced last week to a national referendum. Worries about Europe’s ability to secure outside funding for its Special-Purpose Vehicle (SPV) meant to amplify the firepower of the EFSF bailout fund also carried over from yesterday when China’s state-run Xinhua news service said the country can’t be the EU’s “savior”.

The Australian Dollar bore the brunt of the selloff, with the risk-off mood compounded after the Reserve Bank of Australia cut interest rates for the first time since April 2009, bringing borrowing costs to 4.5 percent. RBA Governor Glenn Stevens cited “moderation in the pace of global growth” and “contained inflation” as the driving logic behind abandoning “mildly restrictive” monetary policy in favor of a “more neutral stance”, adding that the bank now believed price growth would remain on-target through 2013. The Aussie slid as much as 1.2 percent on average against the majors.

Looking ahead, UK Gross Domestic Product and Manufacturing PMI figures headline the docket in European hours, with both reports expected to point toward deterioration. Output growth is forecast to slow for the second consecutive quarter to an annual pace of 0.4 percent in the three months through September. Meanwhile, expansion in the manufacturing sector is likely to slow in October, albeit while remaining in positive territory. On balance, these reports may not prove dramatically market-moving considering the implications of poor economic performance for monetary policy (and thereby, the currency) have already been validated after the Bank of England re-launched its quantitative easing (QE) program last month.

On balance, the US ISM Manufacturing report ought to prove more telling, with expectations calling for growth in the factory sector to accelerate for the second consecutive month in October. While the release falls broadly in line with cautious improvement in US economic data since the beginning of June, traders will be keen to gauge the market’s response as a barometer for investors’ interpretation of positive growth cues out of the world’s top economy. On one hand, the result can be interpreted as supportive for risky assets in that a stronger US is good news for the global recovery at large. On the other, it can be seen as risk-negative in that it argues against the likelihood of a “QE3” stimulus program from the Federal Reserve ahead of the FOMC policy meeting due later in the week.

Asia Session: What Happened

GMT

CCY

EVENT

ACT

EXP

PREV

21:45

NZD

Average Hourly Earnings (QoQ) (3Q)

1.3%

-

1.2%

21:45

NZD

Private Wages ex Overtime (QoQ) (3Q)

0.5%

0.5%

0.5%

21:45

NZD

Private Wages inlc Overtime (QoQ) (3Q)

0.5%

0.5%

0.5%

22:30

AUD

AiG Performance of Manufacturing Index

47.4

-

42.3

0:00

NZD

ANZ Commodity Price (OCT)

-3.5%

-

-1.3%

0:30

AUD

House Price Index (QoQ) (3Q)

-1.2%

-1.5%

-0.5% (R-)

0:30

AUD

House Price Index (YoY) (Q3)

-2.2%

-1.8%

-2.2% (R-)

1:00

CNY

PMI Manufacturing (OCT)

50.4

51.8

51.2

1:30

JPY

Labor Cash Earnings (YoY) (SEP)

0.0%

-0.4%

-0.4% (R+)

2:30

CNY

HSBC Manufacturing PMI (OCT)

51.0

-

49.9

3:30

AUD

Reserve Bank of Australia Rate Decision

4.50%

4.50%

4.75%

5:00

JPY

Vehicle Sales (YoY) (OCT)

28.3%

-

1.7%

5:30

AUD

RBA Commodity Price Index (OCT)

107.5

-

111.1 (R-)

5:30

AUD

RBA Commodity Index SDR (YoY) (OCT)

19.4%

-

21.9% (R-)

Euro Session: What to Expect

GMT

CCY

EVENT

EXP

PREV

IMPACT

7:00

GBP

Nationwide House Prices n.s.a. (YoY) (OCT)

0.5%

-0.3%

Medium

7:00

GBP

Nationwide House Prices s.a. (MoM) (OCT)

0.0%

0.1%

Medium

8:30

CHF

PMI Manufacturing (OCT)

47.7

48.2

Medium

8:45

EUR

Italian PMI Manufacturing (OCT)

47.2

48.3

Low

8:55

EUR

German PMI Manufacturing (OCT F)

48.9

48.9

Low

9:00

EUR

Euro-Zone PMI Manufacturing (OCT F)

47.3

47.3

Low

9:30

GBP

Gross Domestic Product (QoQ) (Q3 A)

0.3%

0.1%

HIGH

9:30

GBP

Gross Domestic Product (YoY)( Q3 A)

0.4%

0.6%

HIGH

9:30

GBP

Index of Services (MoM) (AUG)

0.0%

0.2%

Low

9:30

GBP

Index of Services (3Mo3M) (AUG)

0.5%

0.9%

Low

9:30

GBP

PMI Manufacturing (OCT)

50.0

51.1

Medium

Critical Levels

CCY

SUPPORT

RESISTANCE

EURUSD

1.0000

1.0000

GBPUSD

1.0000

1.0000

--- Written by Ilya Spivak, Currency Strategist for Dailyfx.com

To contact Ilya, e-mail ispivak@dailyfx.com. Follow me on Twitter at @IlyaSpivak

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01 November 2011 08:33 GMT