Dollar and Yen Rise on Haven Demand, Aussie Sold as PPI Disappoints

Talking Points

• Eurozone PMIs to Show Manufacturing, Services Sectors Shrank for Third Month
• US Dollar, Japanese Yen Advance on Safe-Haven Demand as Stocks Decline in Asia
• Australian Dollar Sold After PPI Misses Expectations, Stoking RBA Rate Cut Bets

The preliminary set of April’s Eurozone PMI readings headlines the calendar in Europe. Economists’ median forecasts suggest the region-wide composite reading will print at 49.3, yielding the third-consecutive print below the 50 “boom-bust” threshold and reflecting continued contraction in manufacturing- and service-sector growth. The pace of decline is expected to moderate a bit compared with the 49.1 result recorded in March.

With the outlook for global economic growth in focus as traders size up the ability of a choppy recovery in the US to offset a recession in the currency bloc and slowdown in China, traders’ response to the release ought to be relatively straight-forward. An upside surprise above the “50” threshold is likely to prove supportive for the Euro as well as risk appetite at large, while a disappointing one can be expected to have the opposite effect. Indeed, in the latter scenario would imply stronger headwinds to world output as well as greater scope for future ECB policy easing.

The Japanese Yen and US Dollar outperformed in overnight trade as stocks declined, boosting demand for the go-to safe haven currencies. The MSCI Asia Pacific regional benchmark equity index slid 0.4 percent. The HSBC China Manufacturing PMI gauge printed at 49.1 in April, showing the factory sector shrank for the sixth consecutive month (albeit at a slower pace than in March).

The Australian Dollar bore the brunt of the selloff after first-quarter Producer Price Index figures disappointed, showing wholesale inflation slowed to an annual pace of 1.4 percent. The result marked the weakest reading since the second quarter of 2010 and reinforced expectations calling for the RBA to cut interest rates in May. The markets now price in a 94 percent probability of a 25bps reduction in headline borrowing costs (according to data compiled by Credit Suisse).

Asia Session: What Happened

Euro Session: What to Expect

Critical Levels

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

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