Forex: Aussie Dollar Higher on Chinese Data, Euro Eyes PMI Roundup

Talking Points

Strong Chinese PMI Sends Australian, New Zealand Dollars Higher
Euro Volatility Risk on the Downside Ahead of October’s PMI Data
Japanese Yen May Fall as S&P 500 Futures Hint at Risk-On Mood

The Australian and New Zealand Dollars outperformed in overnight trade, correcting after yesterday’s aggressive selloff amid a flare-up in risk aversion. A pickup in Chinese factory-sector growth likewise helped. October’s flash HSBC Manufacturing PMI gauge rose to 50.9 from 50.2 in the prior month, topping economists’ expectations for a print at 50.4. The result marks the highest print in seven months.

China is Australia and New Zealand’s largest export market, so a pickup in performance there carries positive implications for the two counties’ growth prospects. That points to limited scope for RBA and RBNZ interest rate cuts, boosting the allure of the Aussie and Kiwi for yield-seeking investors.

The preliminary roundup of October’s Eurozone PMI figures headlines the economic calendar in European trading hours. The region-wide composite measure is expected to show manufacturing- and service-sector growth accelerated to the fastest pace since June 2011. Improvements are likewise expected on German and French PMI metrics.

Signs of a pickup in economic activity would argue against an expansion of ECB stimulus efforts and as such may offer a near-term boost to the Euro. Investors’ baseline expectations already call for near-term standstill on the monetary policy front however, so the absence of anything materially new may limit upward follow-through.

Euro-area economic data has cautiously deteriorated relative to economists’ forecasts over recent weeks however (according to data compiled by Citigroup). If that proves to foreshadow an unexpectedly soft PMI data set, downside volatility is likely to be more pronounced.

On the sentiment trends front, S&P 500 futures are pointing strongly higher, hinting at a risk-on mood in the hours ahead. That suggests the safe-haven Japanese Yen may find itself under pressure. Indeed, the correlation between the S&P 500 and the currency’s average value against its top counterparts is now 0.62 on 20-day percent-change studies.

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