China inspires moderate return to risk
Risk currencies remained buoyant overnight following yesterdays encouraging Chinese PMI data. According to a gauge of manufacturing PMI compiled by HSBC, output in the region nudged over the line separating expansion from contraction, rising to 50.4 in October, from a previous 49.5. This marks the first time in 13-months the indicator has been in expansion territory, alleviating hard-landing concerns. Markets responded in kind, increasing the appeal of currencies considered a proxy to China's economy, namely the Aussie dollar and Kiwi. Still, gains were limited, with both currencies remaining supported, rather than a material rise beyond points of resistance.
With US markets closed for Thanksgiving, liquidity was naturally lighter than usual and expected to remain subdued ahead of a shortened session on Friday. Meanwhile, a cease-fire between Israel and Gaza took a negative directive off the table, with markets suitably encouraged as tensions eased in the region.
Euro extends gains
Despite the lack of closure surrounding Greece's next bailout installment, European markets forged ahead with benchmark indices recording respectable gains on the day. The Euro followed suit, leading a move higher against the greenback and maintaining a northern trajectory against the out-of-form Yen. The Euro showed signs of bullish momentum yesterday, slicing through pockets of resistance and beyond the technical milestone of the 200 DMA.
Although talks between Europe's elite have thus far yielded little public result, there remains an element of faith that leaders will bridge the impasse in a meeting scheduled for Monday. There's also talk of Germany easing from their hard-line stance over debt forgiveness for Greece, suggesting a deal could be struck in the distant future where Germany may be willing to take a haircut on Greek debt. Still such a plan would be politically untenable before the Federal Election in late 2013, given the deep-seated resistance from the German people.
Euro-group finance ministers, the IMF and the ECB are attempting to bridge a gap on the time frame Athens has to reduce their budget deficit. Last week the IMF's Christine Lagarde raised concerns over the Euro-group decision to extend Greece's budget targets by two-years, giving Athens until 2022 to reduce their debt to GDP ratio to 120 percent. We anticipate a deal will be struck on Monday, in turn, paving the for at least 31.5 billion euro's of bailout funds, and believe reports of additional 'bundled' bailout funds have merit, in turn another factor underpinning Euro strength. At the time of writing the Euro is buying 1.2880
A$ lethargy - Absent data, low volume to keep the status quo
The Australian dollar is trading moderately higher against major counterparts, led by gains against Sterling, which eased on conjecture over a potential ratings downgrade early in the new year, after the autumn budget statement is released in December. After peaking at 104 US cents in the ensuing period of the China PMI release, the local unit wavered in a 50 pip channel overnight, with supportive behavior displayed at 103.5 US cents. We anticipate these levels will remain in play during domestic trade, with stronger regional market activity likely to promote buoyancy, however, there's little to the 'shock' markets materially higher. In short, we anticipate another lethargic day from a domestic perspective, however lower volumes given the U.S holiday and shortened trading day Friday, increases the risk of volatility should we receive any major headlines later in Europe. At the time of writing the Australian dollar is buying 103.8 US cents.