PMIs make the difference


The US president delivered his State of the Union address in Congress yesterday evening and the USD had a reasonably successful day. The two were not connected. Purchasing managers' index readings from the services sector did not provide a compelling reason to buy the dollar; one was in line with forecast and the other fractionally missed the mark. However, at 54.2 (Markit's calculation) and 56.7 (from the ISM) they looked good enough alongside the equivalent numbers from Europe.

The SOTU speech was of interest to investors but contained nothing of any obvious economic importance. Moreover, it did not tell investor anything they did not already know about the president's approach to policy. There was no coherent reaction from the USD, which came out of the speech a little higher against the EUR and a bit lower against the JPY.


The euro had used up almost all of its ammunition during  yesterday's European session and had little in reserve this morning. What it did have left was of precious little help. German factory orders fell 1.6% in December for a total decline of 7.0% in calendar 2018. Investors marked the EUR down on the news but they did not do a great deal of damage and the euro had recovered within an hour and a half.

However, its earlier losses on Wednesday, mainly as a result of the unfortunate comparison between the Euroland and US PMIs, meant it was lower on the day overall. The EUR lost a net 0.3% to the USD.


There was not a perfect match between the trajectories of WTI crude and the Loonie but there was a clear family resemblance. Both were lower on the day. Oil prices were down by 3.4%, resuming their decline after an overnight pause, and the CAD played a similar game for a daily loss of 0.6% to the USD.

No Canadian economic data were available to investors on Tuesday. More guidance will be on offer today, with building permits for December and the broad-spectrum Ivey purchasing managers' index. Bank of Canada deputy governor Timothy Lane will be speaking this morning. His topic - foreign reserves - is unlikely to influence the CAD.


The GBP slotted effortlessly into the penultimate spot among the major currencies, losing 0.4% to the USD. Having fallen off a cliff after the UK services sector PMI came in at 50.1 it continued its decline into the afternoon before levelling out overnight. In early London it suffered some collateral damage from weak German factory orders before recovering in line with the EUR.

That similarity served as a reminder that the pound and the euro, far from being insulated from one another by the English Channel, face a common threat in Brexit. A disorderly separation on March 29 - the outcome currently enshrined in UK legislation - would hurt Europe as well as Britain, if not to the same extent. Britain's prime minister is meeting EU leaders this week in the hope of finding the "alternative arrangements" called for by parliament last week. Not everyone is optimistic that she will be successful.


After cruising serenely through the New York session the JPY moved higher overnight for a daily gain of 0.3% against the USD. There were no Japanese economic data to help or hinder.

The sense overnight was that two factors combined to take the yen higher.  First, the Reserve Bank of Australia governor unexpectedly pointed out that the next move for interest rate could possibly be downwards. His comment sent the AUD lower and prompted something of a shift towards safety.  Second, the SOTU speech was not wholly emollient and investors might have been taken aback by the president's mention of "a major war with North Korea".

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