Headlines • China’s non-manufacturing PMI rebounds to 56.0 in December from 49.7 in November
• German unemployment falls more than expected, down 22,000 versus forecast of a 10,000 drop
• UK’s manufacturing PMI unexpectedly rises to 49.6 in December from 47.7 in November
• Swiss December manufacturing PMI unexpectedly expands to 50.7, up from 44.8 in November
Market reaction and flows
The dollar came under pressure on Tuesday as encouraging activity data from across the globe helped to bolster risk appetite and weigh on haven demand for the US currency.
The dollar suffered as stocks in European and Asia advanced, although traders noted thin trading conditions, with Japan and mainland China remaining closed for market holidays, and were wary of reading too much into the moves.
EURUSD pulled higher through $1.3000 as German unemployment data came in above forecasts, with European central-bank names seen bidding around the $1.2975 area. Traders said stops were triggered above the $1.3020 level, with sell orders now seen around $1.3050.
Some put the move down to short covering after figures over the weekend showed that speculators on the Chicago Mercantile Exchange (CME) had built bets against the euro up to record levels. EURJPY also recovered, having hit a 10-year low of Y98.71 on Monday, trading up above Y100.00.
GBPUSD also advanced above $1.5600 after UK manufacturing surprised to the upside and saw traders pare bets that the Bank of England would extend its quantitative easing programme. However, GBPUSD was unable to hold on to its gains above the figure amid good selling interest from macro accounts.
Commodity-linked currencies also advanced, with the Australian dollar benefiting from an improvement in Chinese economic data. AUDUSD rose to a four-week high above $1.0300, while EURAUD dropped to a fresh record low under A$1.2600.
Elsewhere, USDJPY remained heavy, trading around the Y76.70 level, with many believing the chances of action from Tokyo to weaken the yen had diminished after a strong warning from the US that it disapproved of unilateral Japanese intervention.
Positioning
Data from the CFTC showed speculators on the CME increased their bets against the euro to record levels in the week to December 27.
Figures showed investors’ net-short positions at the CME rose to an all-time high of 127,879 contracts, up from 113,700 in the previous week.
Citi said its Pain index on hedge-fund positioning painted a much more balanced picture of market positioning, however.
It claimed the index, which tracks the correlation between hedge-fund returns and moves in the exchange rate, showed that investors pared back short EUR exposure as early as mid-November.
“Since our index tracks a range of different strategies, it likely covers a larger segment of the market than the CFTC data,” says Todd Elmer, strategist at Citi. “This leads us to conclude that the latter is probably overstating the degree to which investors remain short EUR, and with relatively balanced positioning to start the year, we doubt this factor will act as a constraint against spot moves in either direction.”
Options
EURUSD vols have drifted lower over the Christmas/New Year period amid low liquidity and tight ranges and as spot has failed to shift much from its $1.30 anchor. Risk reversals have eased as well to levels last seen in May. 1-month riskies were as low as -1.50, which is just half of the medium level recorded over the past six months, SG notes on Tuesday.
Other traders note that EURJPY vols seem cheap relative to AUDUSD vols at the front end, with the former trading at 13.6 versus 14.9 for the latter.
The USDJPY curve remains at its steepest in 20-years, at about 4 vols. Traders note some broker interest in Tokyo over the Christmas/New Year period for JPY puts.
In terms of the biggest absolute moves EURHUF vols were Tuesdayy’s biggest movers, trading 1.3 vols higher at 15.5 this morning as the news flow form Hungury has continued to worsen following a credit rating downgrade from Standard & Poor’s.