The USD relaxed its better tone in early European hours this morning following an acceleration of German GDP growth in Q3 to +0.7% q/q.  However, the USD's inability to hold above EUR/USD 1.4900, the generally soft tone in stocks and weaker gold and oil prices reflects a reduced appetite for risk into the weekend.  Overall Eurozone growth in Q3 at 0.4% q/q was weaker than expected although it confirms that the region moved out of recession in the period.  Cable has made solid gains this morning; shaking off the weaker tone that followed BoE Governor King's dovish rhetoric earlier in the week despite an absence of UK economic data.   President Obama has arrived in Asia on a trip which is supposed to have the issue of China's USD peg positioned prominently on the agenda.   

Despite the fact that signs of asset price bubbles are heightening the need for China to consider tightening policy, there is plenty of scepticism in the market over whether China will make any announcement regarding its effective currency peg before the second half of next year.  This scepticism was linked with the slightly higher value of EUR/USD in early London hours this morning. This is because the idea of a re-valued CNY has been linked with a softer EUR insofar as it may reduce the need for reserve diversification away from the USD.  This logic, however, may be flawed.   There is good reason to suspect that a revaluation of the CNY could open the way for a push higher in EUR/USD, assuming no change in the USD's unattractive yield differential.   Recent interventions by the likes of S.Korea and Taiwan to prevent their currencies appreciating vs the USD can be viewed as a protest against the weakness of the CNY against which they have been losing competitiveness.  Non-Japan Asia together already has the fourth largest weight in the Eurozone's effective exchange rate as this can be expected to rise further in the years ahead.  If the CNY were to be re-valued, it is possible that flexible Asian currencies such as the KRW would also be allowed to move higher vs the EUR, meaning that a move higher in EUR/USD would be a less painful experience for the Europeans.
German Q3 GDP data (at +0.7% q/q) beat the numbers from elsewhere in the region.  Italy managed to post growth of +0.6% q/q and France a more moderate +0.3% q/q.  Together these data prepared the market for a weaker than expected upturn of +0.4% q/q in the Euro region.  The breakdown of these data will not be due until early Dec but early indications suggest that weakness is persisting in household spending though exports have picked up.  With the effective exchange rate moving back to its all time high, the relative strength of the EUR and its potential impact on the exports sector is likely to be a sensitive theme moving forward.  

Cable buyers have pushed it back towards the USD/GBP1.6700 this morning.  Given the relatively soft position of EUR/USD, EUR/GBP has been pushed down to an intraday low of 0.8914 just above key technical support in the 0.8905/10 area.  The strength of this support could limit further gains for cable in the near-term.  AUD edged higher in early European hours in tune with the slightly softer USD but AUD/USD remains off its highs.  

This afternoon, Canadian and US trade data and University of Michigan confidence are scheduled.  The Fed's Dudley and the ECB's Weber are due to speak.  

Jane Foley
Research Director