United efforts figuring out to withstand the EUR weakness

Market Comments:

Heightened fears of an imminent China hike ensured risk was definitely OFF in the overnight session with a firming dollar feeding in to a weak Wall St translating into a softer tone for commodities.

There was nothing to stand in the way of EUR weakness with Greek yields rising on waning appetite for Greek debt and we touched a fresh 5-month low vs. the USD.

EUR/GBP also confined to a test of 5-month lows as GBP held up well, buoyed by ongoing M&A talk, a surprise drop in the claimant count (at -15.2k the biggest fall since Apr. 2007) and BOE minutes showing talk of positive growth in Q4.

Commodity Forex currencies were also on the rack as gold slumped over 2% and the AUD was pressured by China tightening angst. CAD also beaten lower following benign CPI readings (mostly below consensus) and weak manufacturing sales (+0.1% m/m vs. +0.7% consensus) though mild respite from the selling was seen after Russia said it had begun buying CAD for its FX reserves. NZD down 2.2% was the worst performance for the Kiwi since late November.

Eyes were firmly locked on the slew of Chinese data releases in the Asian morning and activity was relatively muted ahead of the release. In the end, most data was better than expected though the feeling in Asia was that, while better they were not as extreme as had been feared (and nowhere near the extreme rumours bandied around ahead of the release.

For the record Q4 GDP came in at +10.7% y/y vs. +10.5% expected with PPI and CPI at +1.9% y/y and +1.7% y/y respectively with the pace of retail sales accelerating to +17.5% y/y from +15.8% in November. Tempering the exuberance however were industrial production and fixed asset investments which both failed to match expectations. (+18.5% y/y versus 19.6% expected and +30.5% y/y versus 31.5% expected respectively).

The kneejerk reaction was for the dollar to firm with the EUR taking the brunt of the action. However, the volatility was over within a few minutes and Asia spent the rest of the session confined to ranges.
Apart from the China data, there was nothing much to influence trading. Early NZ data gave the Kiwi a boost as both business PMI and retail sales beat forecasts. However, the China data soon knocked it back to opening levels.

Looking ahead, it would appear that all of the positioning for the data was made yesterday though the risk aversion theme looks set to continue near-term. If German PMI services and manufacturing data matches the weaker trend seen in the ZEW surveys then EUR looks ripe for a test of the psychological 1.40 level.

GBP may find further ammunition to maintain its over-performer status with the release of the CBI industrial trends report. Other UK data focuses around public sector debt and money supply.

In the later sessions we have Canada wholesale sales, weekly US jobless claims and Philly Fed index and leading indicators on tap. The BOC’s monetary policy report and press conference completes the day.