USD – The dollar is mixed as stocks and commodities begin the week with a sharp rally after US manufacturing data expanded last month. ISM Manufacturing unexpectedly rose to 51.5 from 49.6 in the previous month, with a reading above 50 representing expansion. The positive reading was led by an expansion in the new orders component, reflecting a more positive outlook for the manufacturing industry than many investors had feared. This is also a positive factor as US jobs data comes into scope with key reports due this Friday. The economic slate is rather light in the lead‐up to Friday’s numbers, but investors will take note of ISM non‐manufacturing and a payrolls report from private provider ADP both due tomorrow. American politics will take front and center on Wednesday night, with President Obama taking on the Republican candidate Mitt Romney in the first of three debates. Government spending, taxes, healthcare reform and the looming “fiscal cliff” are sure to be hot topics.
Thursday sees Challenger job cuts, weekly jobless claims, and factory orders. Minutes from the FOMC’s last meeting, at which policymakers announced QE3, will also be parsed through on Thursday. Friday sees the release of the all important non‐farm payrolls and unemployment rate with a modest gain expected in both. The numbers will be watched particularly closely this month as one of the primary goals of QE3 is to encourage job growth. Consequently, the dollar will likely remain within its increasingly narrow ranges against most of its major counterparts ahead of the latest look at labor market conditions.

EUR – The euro rebounded from a three‐week low against the USD as fears of economic collapse in Spain recede, at least for the time being. Last week, Spain unveiled an ambitious government budget for 2013 that will bring more than €11B in spending cuts in what many hope are preliminary steps towards requesting further assistance from international creditors. Meanwhile, investors are breathing a collective sigh of relief after a series of “stress tests” of Spain’s major financial institutions indicated that the banking sector will likely need €70B – well within the €100B already earmarked by the ECB. While not as economically significant as the debt crisis in Spain, recent developments in cash‐strapped Cyprus highlight the policy divide that is straining tensions between French and
German leaders. While often overlooked, Cyprus became the fifth EU nation to seek aid after Greece, Ireland, Portugal and Spain. The Cypriot ruling communist party, AKEL, rejected key preconditions in a proposal from international lenders, rebutting with pleas for actions that would foster growth rather than just cut spending.
Party Chief Andros Kyprianou told reporters that “in all other countries where the troika’s proposals were implemented, not only have their economies failed to recover, but their recessions have deepened.” The common currency will thus remain mired within its recent ranges, albeit towards the higher end as investors feel better
about the outlook for Spain.

GBP – Sterling is lower to start the week, falling versus most of its major peers as data suggests that the recession in the UK is far from over. PMI manufacturing fell by more than expected, dropping to 48.4 from 49.6 in the previous reading. British home prices also missed the mark, stagnating after last month’s 1.3% gain. British policymakers now find themselves in a tight spot with little further room to ease policies without risking a downgrade to the nation’s AAA sovereign debt rating. The budget deficit for 2012 is likely to be in excess of 8%, which despite all of the talk of austerity, is little different from last year. The BoE meets on Thursday, but no change in policies is expected.

JPY – The yen is slightly weaker this morning, but remains towards the higher end of its recent ranges. Japan PM Noda announced a new cabinet over the weekend ahead of possible general elections this fall. Koriki Jojima was named Finance Minister, making him the fifth policymaker in the seat over the past three years. In his first public appearance, he reiterated that the yen’s rise has been “one‐sided”, reflecting the slowdown in Europe and the US rather than Japan’s economic fundamentals. Jojima also echoed his predecessor’s position, pledging to work with the BoJ to defeat deflation and manage gains in the currency.

Commodity Currencies – The commodity linked currencies are generally higher as rising stocks and raw good prices encourage a bit of risk taking. The CAD has pared much of Friday’s late‐day losses versus the USD largely supported by the rebound in the price of oil – Canada’s main export – and on the strong manufacturing data out of the nation’s Southern neighbor. Investors will take note of unemployment data expected to remain flat tomorrow. Similarly, the MXN gained by nearly half of a percent against the dollar this morning following the manufacturing data out of the US, and as rising stocks encouraged investors to seek the peso’s relatively high yields. Growth in the US manufacturing sector often translates into increased employment of Mexican migrant
workers, which in turn results in increase peso demand as workers send earnings back to their families still in Mexico. The AUD is higher this morning, but gains have been rather modest ahead of a much anticipated RBA meeting. Investors are currently pricing in a further reduction in Australian interest rates with an 86% probability, but with such high expectations, the Aussie could be primed for a strong rebound should policymakers keep rates on hold.

RMB – The Chinese yuan is stronger against the USD after HSBC Sep. PMI improved to 49.8 (vs 47.8 flash) compared to 47.6 in Aug. Despite the improvement, headline PMI remains slightly below 50 for the 11th straight month indicating contraction. The new export orders sub‐index fell to a 42‐month low of 44.9 in Sep., which is hardly surprising given repeated warnings from China’s Ministry of Commerce officials on the grim outlook for exports. The sharper contraction of new export orders and the lingering pressures on job markets suggests that China should step up easing to support growth and employment. The rise in headline PMI may provide some positive relief for the yuan this week.

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