FX Update: Ugly flash EU PMI’s pressure EUR

Friday saw a rather negative session after China announced a cancellation of a planned trade delegation trip to Montana and Nebraska, sparking concerns that the US-China trade negotiations are on the wrong track. Rumours have swirled that China is looking for a partial deal and a punt on the more contentious issues, while the US side is only interested in a comprehensive agreement.  China’s announcement came about an hour after Trump said on Friday that he isn’t interested in a “partial deal”.

Asian markets stumbled out of the gate to start the week and South Korea reported a drop in exports in September of a stunning -21.8%, led by a drop in semiconductor shipments. The mood darkened again in early European trading hours as the French and especially Germany flash September PMI surveys from Markit rolled in, with Germany’s Manufacturing PMI survey coming in at a staggering, worst for the cycle 41.4.

Wolf Richter over at wolfstreet.com wrote an excellent post describing what is going on at the Fed with its repo operations, which actually hearken back to its approach to managing liquidity issues prior to 2008 – however, the size now is far greater than anything back then save for a single spike after the September 11, 2001 terror attacks. The USD outlook and how the market adjusts to these new liquidity operations looks pivotal this week after the FOMC meeting failed to produce immediate takeaways. The Fed is set to do 2-week repos starting with one tomorrow and we also have a heavy calendar for Treasury issuance this week.

Liquidity needs will only rise from here with the rise in US budget deficits and will spike further in a recession scenario or in the event of general market disruptions. Will the Fed be happy to continue to expand these operations ad infinitum? Eventually this ends up as QE, but in the meantime, I’m not at all sure that the market’s complacency on this issue is justified, nor do I get the sense that the Fed has shown itself to be on the ball and set to get ahead of the curve on bringing further policy easing or overwhelming liquidity provision.

Chart: EURUSD
EURUSD traders of both stripes have suffered during the recent, churning price action around the 1.1000 level as neither the sense that this is the last blast of easing from the Draghi ECB, nor the fairly hawkish FOMC meeting have been able to drive a notable directional move. The USD looks firm to start the week and a very ugly Germany Manufacturing PMI reading for September sets a negative tone for the euro this morning. A solid hold below 1.1000 could set up a run to at least 1.0800 for the pair.