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Traders were well surprised yesterday, when the US manufacturing ISM was released, after poor showing in the regional indexes with the Chicago, Empire State and Philly Fed all printing on the negative side, the ISM unexpectedly turned back to expansion territory in September. The headline index rose from its multi-year low of 49.6 to 51.5, while only a marginal improvement was expected. The breakdown shows that new orders (52.3 from 47.1) and supplier deliveries (50.3 from 49.3) turned back to expansion territory, while production (49.5 from 47.2), backlog of orders (44.0 from 42.5), customer inventories (49.5 from 49.0), new export orders (48.5 from 47.0) and imports (49.5 from 49.0) picked up, but remained below the 50 benchmark level. Employment, on the contrary, rose sharply from 51.6 to 54.7, while inventory sentiment weakened from 53.0 to 50.5. The prices paid index accelerated further, from 54.0 to 58.0 in September, indicating that manufacturers face increasing production costs. The sharp improvement in the headline figure is an encouraging sign, suggesting that manufacturing activity grew again after three months of contraction. The details are a bit more mixed with several sub-indices still contracting, suggesting that the climate remains difficult. In the coming months, it will be interesting to see whether the momentum improves further.
The EUR/USD hit an intraday top at 1.2939 after the release of the US ISM of the manufacturing sector. Friday’s top at 1.2960 stayed out of reach. EUR/USD did find a new equilibrium in the 1.29 area at around the close in Europe. Also the Fed’s Bernanke gave a speech on monetary policy. The Fed president countered several objections against the aggressive Fed action to support growth. Amongst other issues, he rejected the critics that Fed policy would damage the long-run value of the USD dollar as he expected stronger growth to support the US currency. We did see little new in Bernanke’s speech. The impact on EUR/USD trading was close to non-existent.
EUR/USD closed the on Monday at 1.2888, compared to 1.2860 on Tuesday.
Today, some Asian markets (including Chinese, South Korea and India) are still closed. The gains on the European and, to a lesser extent, on the US markets also support Asian equities this morning. However, there is no risk-on euphoria. The AUD was sold after the RBA cut its target rate by 25 basis points to 3.25%. This RBA move was only expected by a minority of analysts. This move is a mixed signal for global sentiment on risk (indication of weaker growth in the region, but also a sign that more central banks are joining a growth supportive policy). EUR/USD is a few ticks higher after the announcement of the RBA decision.