FX is a mixed basket this morning as the North American currencies and the Euro round out the top three, while the Australian Dollar and the Japanese Yen – often on opposite sides of the spectrum – are co-laggards. Notably, the July private sector reading of Chinese manufacturing growth, the HSBC Flash Manufacturing PMI survey, came in well-below expectations at 47.7, suggesting that the pace of the Chinese slowdown has accelerated.
Also hurting the Australian Dollar on the day was the softer than anticipated 2Q’13 inflation reading, which saw the headline yearly figure come in below the prior quarterly reading for the first time since the 2Q’12; the Consumer Price Index increased from +1.2% in 2Q’12 to +2.5% in 1Q’13.
In context of the broader slowdown in the Australian economy onset by the end of the global commodity supercycle, the softer inflation figures alongside a pressured labor market give reason to believe that the Reserve Bank of Australia may rethink the ‘pause’ in the rate cut cycle indicated in the July meeting Minutes; and the probability of a 25-bps rate cut at the August meeting has now increased from 28% on July 1 to 39% today, according to the Credit Suisse Overnight Index Swaps.
Elsewhere, the Euro’s resilience has continued amid signs that the Euro-zone may be starting to emerge from the depths of the recession, with the preliminary July Euro-Zone PMI composite ticking up to 50.4, the first reading in expansion territory (>50) since January 2012 (50.4). Growth speculation will accelerate should we see two consecutive readings above 50, which hasn’t transpired since July-August 2011.
Read more: Euro Rallies as PMI Knocks Out Expectations
Taking a look at European credit, further gains by the periphery have proven to be supportive of the Euro on Wednesday. The Italian 2-year note yield has decreased to 1.539% (-3.0-bps) while the Spanish 2-year note yield has decreased to 1.860% (-1.6-bps). Likewise, the Italian 10-year note yield has decreased to 4.333% (-3.0-bps) while the Spanish 10-year note yield has decreased to 4.636% (-3.4-bps); lower yields imply higher prices.
RELATIVE PERFORMANCE (versus USD): 10:45 GMT
Dow Jones FXCM Dollar Index (Ticker: USDOLLAR): +0.24% (-0.35% prior 5-days)
By Christopher Vecchio, Currency Analyst