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The US continued the run of better than expected global manufacturing data for December. As it stands the US is seeing the greatest increase in the pace of activity and the new orders component of the survey rose to its highest level for more than 8-months at 57.6, the employment index was also at a 6-month high, which suggests growth in the US was fairly robust at the end of last year. 

China is coming in second place, although its overall index jumped back into contraction territory the all-important new order sub-index failed to follow suit and rose to 49.8 from 47.8 in November. Europe is still looking the weakest out of the major economies, however at least data there is moving in the right direction.

Germany's PMI data for December was revised to 48.4, while Italy's was also revised higher and France's reading stayed the same last month at 48.9. PMI manufacturing data tends to have a good correlation with overall GDP growth, which suggests that the currency bloc experienced a mild recession in Q4 2011. However, Europe tends to follow the US economic cycle with a lag, so the good news emanating from the US could rub off on Europe, especially large exporting powers like Germany as we move through 2012.

There was some other good news for Berlin after the number of unemployed fell in December by a larger than expected 22,000, which pushed the overall unemployment rate down to 6.8% from 6.9%, which is a fresh re-unification low. The reason was two-fold: firstly the extremely mild winter and secondly a fairly robust export sector. Although German exports have shifted to China from the US in recent years, the US is still a major source of demand for the world's exporters and its strength could be Germany's gain.

So after a bleak end to 2011 and fears that 2012 could plunge the western world into another recession there is a tiny glimmer of light for the optimists in the market to grab hold of. This continues to weigh heavily on the dollar, and the dollar index has fallen more than 50 pips so far today, back below the 80.00 mark. The dollar index hasn't fallen below 79.50 for nearly 3 weeks, so it is currently at a crucial level.

The weakness in the dollar at the start of the year may have been fuelled by reports from the CFTC that speculative short euro positions were at a euro-era low of -128,000 contracts. Hence this could be a corrective squeeze higher as the market may have fretted that its euro positioning had become too one-sided. Thus, the first trading day of the London session has seen EURUSD jump back above 1.30 and test as high as 1.3050. A weak dollar is also boosting commodity currencies. AUDUSD is up about 1.4% today along with NZDUSD, while USDCAD has fallen more than 1% and EURUSD is up close to 1%. This dollar weakness is also boosting oil and other commodities. Brent crude is back above its 200-day sma at $111.02 per barrel, and the gold price is back above $1,600 per ounce, the next level of resistance is $1,630 - its 200-day sma.

In the absence of Eurozone data -debt auctions don't kick off in earnest until next week and the next EU summit is not until the end of the month - the markets have reacted to economic data and risk assets are sensitive to any disappointing readings. The next major round of data is tomorrow's PMI services sector readings for last month and US Non-Farm Payrolls released on Friday. Right now 1.3099 is the 21-day sma that has capped gains since early December for EURUSD, economic data in the next few days could determine if we break above this level or not.

But a good reminder that all is not well in the Eurozone was the increase in Spanish and Italian bond yields today. Italian yields rose to just below 7% at 6.96% at one point today, while Spanish 10-year yields jumped 20 basis points, later this afternoon rumours were doing the rounds that the ECB had intervened in the markets. The two countries have to auction EUR24bn of debt this month alone, and after the new Spanish PM announced more austerity measures at the end of last week some commentators have voiced fears that this will actually hurt debt dynamics this year by thwarting growth.

So the disconnect between bonds and other risky assets today is a cause of concern to me, and we may be confined to some sharp range trading activity in the next few days especially as we lead up to the French long-term debt auction on Thursday when Paris tries to sell bonds maturing in 2021, 2023, 2035 and 2041. EURUSD could run out of steam around 1.3200 if it breaks above 1.3100, while 1.2950 is still good support for now. In AUDUSD,  1.0415 is the 200-day sma, and 1.0380 has been sticky today, support lies at 1.0345 then at 1.0295.

Best Regards,

Kathleen Brooks| Research Director UK EMEA |

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