Better data out of Asia and Europe helped the Australian dollar (AUD) and euro (EUR) remain bid in morning European dealing today, while USDJPY continued to gain traction in the wake of yesterday's Federal Open Market Committee (FOMC) meeting minutes, which suggested that the Fed's plans to taper quantitative easing (QE) remains on track.
In China, the HSBC flash PMI reading printed at 50.1 versus 48.3 expected, which was the first time PMI has moved above the 50 boom/bust line in four months. The news was particularly positive because the HSBC report is viewed by the market as being more accurate than the official Chinese government report, which comes out next week. The HSBC report is also more representative of the middle market companies rather than the big industrial concerns that comprise the government PMI data.
As such, today's PMI report showed a marked improvement in manufacturing activity, especially on the domestic front. New orders, output, and backlog of work all increased, suggesting that demand may be picking up once again, which should help stabilize growth in China.
The surprisingly strong Chinese PMI data had an immediate positive impact on AUDUSD, which popped above the .9000 barrier and rose to a high of .9024 before running into some profit taking.
Despite today's rebound, the Aussie remains inordinately weak with market sentiment still heavily skewed to the bearish side as the consensus view holds that the slowdown in China will force the Reserve Bank of Australia (RBA) to continue cutting rates for the foreseeable future.
That's why today's rally may be temporary, as skepticism continues to be the dominant theme anytime AUDUSD gains ground. The pair is unlikely to find any meaningful support until the economic situation in China shows sustainable evidence of growth.
A Clear Recovery Sign in the Eurozone
Meanwhile, in Europe, EURUSD held steady near the 1.3350 level after Eurozone PMI data showed further improvement in both the manufacturing and service sectors. The manufacturing and services PMI readings increased to 51.3 and 51.0, respectively, as manufacturing held above the 50 line for the second month in a row, while services broke through into expansionary territory.
This was the first time in more than 18 months that both indices were above the 50 boom/bust line, which provided the clearest evidence to date that the Eurozone economy is coming out of recession.
Although French data was weaker, German PMIs and the periphery economies continued to improve, indicating that the pickup in demand may be expanding beyond the region’s largest economy. The EURUSD held steady, popping above the 1.3350 in the aftermath of the release, but retreated slightly as the morning wore on.
USD/JPY to Target 99.00 Level
The correction in high-beta currencies is a reaction to yesterday's FOMC minutes, which while somewhat mixed, still reaffirmed the Fed's commitment to taper QE by the end of this year. The US dollar (USD) continued to remain bid, with USDJPY taking out the 98.50 barrier in late-morning London trade.
Unless today's US data, which includes weekly jobless claims and the flash PMI readings, proves to be a massive disappointment, dollar strength is likely to continue. Having now relieved its bearish bias by taking out 98.50, USDJPY looks ready to tackle 99.00 as the day progresses.
By Boris Schlossberg of BK Asset Management