Euro Climbs on Risk Appetite Despite Record Low PMI

Friday, 21 November 2008 09:39:35 GMT

Previous Articles

• Nov 21 - Euro Climbs on Risk Appetite Despite Record Low PMI
• Nov 21 - Euro Could Rebound Against US Dollar as Light Calendar Boosts Risk Appetite (Euro Open)
• Nov 20 - US Dollar Testing More Bullish Waters, US Jobless Claims, Philly Fed Disappoints as Usual
• Nov 20 - Pound Losses Continue As Retail Sales Fall For Second Month
• Nov 20 - A Drop in U.K. Retail Sales Would Confirm Bearish Pound Technical Outlook
• Nov 19 - Euro-US Dollar Surges on Bigger-Than-Expected Drop in US CPI Only to Drop Later on Risk Aversion
• Nov 19 - Pound Surges Despite BoE Minutes Signaling More Rate Cuts Ahead
• Nov 19 - Australia to See Recession in 2009, Bank of England Minutes Ahead (Euro Open)
• Nov 18 - US Dollar: CPI Forecasted to Fall by Most on Record, But Fed Meeting Minutes May Steal the Show
• Nov 18 - Currency Trading Markets Remain Highly Correlated to Dow Jones, Crude Oil Prices
• Nov 18 - Pound Trades Heavy As Inflation Drops the Most in 11 Years
• Nov 18 - Easing Consumer Prices Validates Bearish Pound Technical Outlook
• Nov 17 - US Dollar Remains Inversely Linked to Stocks, But Correlations Don't Hold Forever...
• Nov 17 - US Dollar Trading Ranges Could Break Amidst US, UK, Canadian Event Risk
• Nov 17 - Euro, Pound Rally Despite Toothless G-20 Summit
• Nov 17 - Japanese Economy Sinks into Recession, G-20 Offers Little to Shaky Markets (Euro Open)
• Nov 14 - US Dollar Still the Safe Haven of Choice, Fed Meeting Minutes Present Event Risk Next Week
• Nov 14 - Euro Consolidates as Economy Expectedly Falls Into Recession, Will U.S. Retail Sales Spark Volatility?
• Nov 14 - US Dollar: Retail Sales, Import Prices Fall By Most On Record
• Nov 14 - Euro, British Pound Keep Pressure on the US Dollar Ahead of Retail Sales Report (Euro Open)

Written by John Rivera, Currency Analyst

The Euro rallied more than 200 bps from yesterday’s lows despite a record low PMI reading, as a return of risk appetite sparked bullish price action. The Euro-Zone Purchases Manger’s composite index fell to 39.7 for November from 43.6 the month prior.

Talking Points
• Japanese Yen: BoJ Leaves Rates Unchanged
• Pound: Rally’s On Risk Appetite
• Euro: PMI Falls To Record Low
• US Dollar: Risk Winds To Dictate Price Action

Euro Climbs on Risk Appetite Despite Record Low PMI

The Euro rallied more than 200 bps from yesterday’s lows despite a record low PMI reading, as a return of risk appetite sparked bullish price action. The Euro-Zone Purchases Manger’s composite index fell to 39.7 for November from 43.6 the month prior. The region saw weakness in both the manufacturing and service industries which fell to 36.2 and 43.3 respectively. The survey of European executives demonstrates the heighten level of fears which could see businesses continue to retrench further depressing the economy. French consumer spending also declined 0.4% after a gain of 0.5% in September as recession concerns have lead to consumers curbing their spending.

Comments from ECB member Yves Mersch that large interest rate cuts could be counter productive, has also lend support to the Euro. The MPC’s decision maker would also dispel concerns over deflation saying "We have to look beyond such short-term falls in prices, just as we looked beyond short-term increases when commodity prices spiked". This is a sign that the central bank will maintain its measured pace of easing and will most likely cut rates by 50 bps, resisting a more aggressive move similar to the BoE and SNB. The Euro continues to remain range bound trading between 1.2400 and 1.300 as support levels held despite the panic that gripped markets yesterday. Therefore, today we could see traders take the price level toward the upper levels of the range with a test of the November 19th high of 1.2800 a possibility.

The Bank of Japan expectedly left their benchmark rate unchanged at 0.30%, as the central bank had little room to maneuver. Governor Masaaki Shirakawa is exploring new ways to infuse money into the system, such as accepting corporate debt as collateral, the central bank said in a statement in Tokyo today. After testing 93.50 yesterday the USD/JPY has erased most if yesterday’s losses climbing back above 95.40 on the back of increasing risk appetite.

An empty economic calendar will leave the dollar at the mercy if risk winds. The dollar could strengthen today if traders continue to price in a doomsday scenario which is being driven by fears that government may not act fast enough to save the U.S. auto industry. Safe haven flows drove the dollar higher yesterday , but overnight sessions have shown signs that bargain hunters may jump into the market today and drive stocks higher and in turn the dollar lower. This sentiment may not last long as the troubles for the U.S. auto industry and Citigroup’s declining market value will continue to be weighing factors.

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Related Articles:
ECB Mersch: Large Interest Rate Cuts Could be Counterproductive
European Services, Manufacturing Contract at Record Pace, Heightening Fears of a Deep and Severe Recession

To discuss this report contact John Rivera, Currency Analyst: jrivera@fxcm.com