- EUR Finds Trouble at the Top
- US Data Turns up Mixed (and Unreliable)
- 3 Factors That Could Revive the EUR
- China's Banking Troubles Continue
New highs were made in currencies overnight, but the euro (EUR) and Swiss franc (CHF) have since struggled to hold onto their gains. Both currencies rose to the strongest levels in nearly two years against the US dollar (USD), and demand for EUR can be seen against all pairs. However, without fundamental data to support the move to new highs, the EUR and CHF may find it difficult to extend beyond current levels in the near term.
In fact, all major currencies are vulnerable to near-term corrections until more significant US economic data is released next week simply because many of these pairs have extended to extreme levels. Don't expect a deep correction, however, because the pressure on Treasury yields prevents a meaningful recovery in the dollar.
This morning's US economic reports were mixed, with jobless claims edging lower and the trade balance widening slightly. Jobless claims fell to 350k for the week of October 19, down from 362k the week prior. Economists were looking for a stronger number, but the release as a whole continues to be distorted by the backlog in California, according to the Bureau of Labor Statistics.
The agency also said it can't accurately determine how many non-federal workers filed for claims, but federal workers filed 44.1k claims two weeks ago. In other words, given the labor department's skepticism about jobless claims, the data is basically unreliable.
In the month of August, the trade deficit rose to -$38.8 billion from -$38.6 billion the prior month. This small deterioration was better than expected and caused largely by stagnation in imports and exports.
3 Factors That Could Revive Eurozone Growth
The euro, on the other hand, shrugged off weaker flash PMIs for the month of October. While manufacturing sector activity strengthened slightly this month, service sector activity slowed more significantly, causing the Eurozone PMI composite index to drop from 52.2 to 51.5.
France experienced deterioration in both parts of the economy, but Germany only saw slower growth in the service sector. Considering that this is the first decline in the PMI composite index since April, there's no need to ring alarms because faster manufacturing activity in China, the temporary resolution of the US fiscal debt crisis, and stronger investor demand (as measured by the ZEW) could come together to fuel a recovery in the coming months.
Banking Troubles Still Brewing in China
Finally, the world has its collective eyes fixated on China, where manufacturing activity improved in October, according to HSBC, although short-term interest rates continue to rise rapidly. The seven-day repo rate is now at a four-month high, and this move is being caused by the central bank's decision to refrain from injecting liquidity this week.
We will keep an eye on this story because a persistent rise in Chinese yields could add pressure on Asian stocks, translating into potential weakness for high-beta currencies.
See related: China Bank News Kills the High-Beta Heyday
By Kathy Lien of BK Asset Management