For those long of Sterling would have been rubbing their hands with glee overnight, with the UK economy lifting out a recession with a 1-percent surge in third-quarter GDP. Despite risk trends favoring the greenback, sterling forged gains against major counterparts with investors encouraged by the Olympics-fueled strength from the economy. While it may not suggest broader economic headwinds will dissipate, it’s clear the recent macro picture has picked-up, implying less of a chance of further monetary easing from the Bank of England.  Cable surged in the period to follow with a break of $US1.61 before leveling out around the 1.6140 levels. Residual support across the risk spectrum was also noted at the expense of the greenback which later managed to claw back gains alongside softer US equities.

True to form, the health of corporate America proved to be a stumbling block for US equities despite a round of encouraging economic reports. Durable goods orders surged 9.9 percent in September, from a previous fall of 13.5 percent. The closely watched weekly jobless claims also came in better than expected while pending home sales continued to show signs of improvement.  Still, despite the stronger data pulse, there remains a number of themes in the way of a stronger, sustained leg higher. The so-called ‘fiscal cliff,’ referring to the expiration of the bush-era tax cuts in late 2012, is also taking on greater market relevance in conduction with automatic spending cuts in early 2013. Political uncertainty is also proving to be a stumbling block ahead of the presidential election.

Earlier in Europe, markets found solace in the completion of Portugal’s IMF review and remain hopeful Greece will soon reach an agreement over budget cuts needed to receive their next bailout tranche.

The Japanese Yen maintained its south-bound trajectory with the USDJPY pair making a convincing break the upside of Y80 level to 4-month highs of Y80.35. The Yen’s welcomed descent is in anticipation to next week’s Bank of Japan policy meeting were its expected the bank will unleash a new round of monetary easing.

Closer to home, after yesterday surge on the back of the RBNZ policy decision, the Kiwi took a hit after newly appointed RBNZ governor Graeme Wheeler said the bank has “scope to cut interest rates if needed.”  After reaching highs of 82.43 US cents yesterday, the NZDUSD pair is stabilizing around the 81.85 US cent level.

The Aussie dollar rose to highs just shy of 104-figure before a lackluster performance from U.S equities began to weigh on risk trends. After falling to lows of 103.35 US cents, the local unit has consolidated higher around 103.6 US cents. Still, it’s been a positive week for the Aussie dollar with tentative signs China is stabilizing and paring back of interest rate cut expectations guiding a move higher. In the absence of scheduled data today, we anticipate regional equity performance to govern A$ dollar moves with further weakness likely to be contained at 103 US cents before the European handover.

A series of set-backs failed to dull the Australian dollar’s appeal overnight which built on yesterday’s post CPI and China PMI gains. Stronger than anticipated third-quarter CPI data breathed new life into the Australian dollar yesterday, and a subsequent bounce in Chinese manufacturing PMI confirmed the trend. While the rate of underlying inflation remains neatly within the RBA’s 2-3 percent target range, investors have pared expectations of a Melbourne Cup day interest rate cut. Bids for the Australian dollar also increased after yesterday’s preliminary manufacturing PMI. Manufacturing PMI rose to 49.1 in October from a previous 47.9 according to HSBC’s preliminary estimates. Although the index is still in contraction, it’s seen as another sign China’s economy is beginning to stabilize. While the RBA may categorize inflation pressures as transitory given the introduction of the carbon tax, it’s also apparent they now have less “scope” than previously thought. They may also acknowledge tentative signs China is stabilizing, in light of the strong data pulse from the region.

The Kiwi coat-tailed the Aussie higher for most of the session before taking over in the last hour, coinciding with the RBNZ policy decision which saw the overnight cash rate on hold at 2.5 percent. The ensuing statement showed no indication lower interest rates are on the agenda, noting “risks to the global outlook are more balanced.” The Kiwi is now leading a risk offensive against the greenback testing short-term resistance at 82 US cents, and Aussie dollar appears to be receiving residual support testing overnight highs of 103.5 US cents.

Nevertheless, risk trends abroad were hardly conducive to a risk rally with concerns from both sides of the Atlantic remaining play. Euro-Zone PMI releases kept the Euro under moderate pressure. Both German services and manufacturing PMI fell short of estimates, and Euro-Zone Composite fell deeper into contraction territory. Spain’s economic fortunes also continue to hang in the balance. According to central bank estimates, growth contracted by 0.4 percent in third-quarter from the previous quarter. Investors also appear to be growing impatient with Madrid’s apparent reluctance to request financial aid, considered a critical part of the equation needed to restore confidence in the broader Euro-Zone.

US markets managed to finish only moderately lower after Tuesday’s slide. The DOW and S&P500 close down 0.19 and 0.31 percent respectively. The health of corporate America remained a key concern for US markets, but recent losses across equities suggests markets have priced in further disappointing earnings – in  turn, providing greater scope for upside surprises. The Markit manufacturing PMI rose to 51.3 in October from a previous 51.1. Economists had anticipated a slight larger rise to 51.5.

After being the recipient of solid support in recent sessions, the Euro retraced recent gains overnight with a break below $US1.30 before finding support around $US1.2550.  Spanish debt concerns began to infiltrate investor psyche once again after the central bank’s growth revisions and ratings agency Moody’s downgraded five Spanish regions, including that of Catalonia ahead of a November 25 election to vote of separating from Spain. An earlier debt auction which was mixed but the prospect of a bailout continued to cushion demand.

Both the Australian and New Zealand dollars fell in unison with US dollar strength noted across major counterparts. Support around 102.9/95 failed to hold with sell-stops below encouraging a deeper correction for the Aussie.  The health of  US corporates remained a key point of contention for US markets with industry heavyweights such as Xerox, DuPont and UPS failing to meet revenue estimates. The DOW and S&P500 slumped 1.82 and 1.44 percent respectively.

The Canadian dollar was an exception to the rule, managing to ward off  weakness seen across the commodity currencies. Recent sessions have seen the Canadian dollar hit by what appeared to be a dovish turn by Bank of Canada Governor Mark Carney. Last week Carney noted: “Elevated global uncertainty is holding back global economic growth and, thus, the demand for Canadian exports. In addition, there is some evidence that global uncertainty is affecting domestic activity.” But Carney maintained the tightening bias overnight; with the policy decision statement showing “modest withdrawal of monetary policy stimulus will likely be required, consistent with achieving the 2% inflation target.” The statement added, “The timing and degree of any such withdrawal will be weighed carefully against global and domestic developments, including the evolution of imbalances in the household sector.”

Local pundits will now be watching closely at today’s domestic inflation data, with the HSBC China manufacturing PMI also likely to be a key barometer for the Australian dollar. The RBA’s preferred measure of consumer prices (the trimmed mean and median) which excludes the most volatile prices on the scale, are both expected to record 0.6 percent growth on quarter, or 2.2 percent annually. Headline inflation is expected to record growth of 1-percent from 0.5 percent in the second-quarter, representing annual growth of 1.6 percent. The bank has made clear the local inflation outlook provides “scope” for further monetary accommodation and markets have suitably priced in the chances of a November rate cut. Nevertheless subdued inflation will serve as a reminder of the RBA’s “scope” to respond to struggling sectors of the local economy. The HSBC Flash China manufacturing data scheduled for release at 1245 AEST will also be closely watched and a considerable barometer for the Australian dollar.  Any deviation from the downside of estimates will once again place the local unit in a vulnerable position, with support at 102 and 101.5 US cents likely to help contain losses before the European handover.  Nevertheless, the upside potential is also present given markets have – for the most part – baked a rate cut on Melbourne Cup day. Should both inflation and Chinese data outpace expectations, we anticipate buyers to return to the market with a break above 103 US cents expected.

The Aussie dollar remained under moderate pressure overnight following the Mid-Year Economic Fiscal Outlook which unveiled a series of budget cuts in an effort to return the budget to surplus. Lower tax receipts and global headwinds have hit the government’s bottom line, requiring further cost cutting in attempt to squeeze out a surplus this year. It’s apparent any fiscal restraint will flow-on to monetary policy, providing even greater scope for the RBA to maintain an accommodative policy stance. This took away some of the Aussie dollars lustre yesterday, but we’ve still seen moderate support above the 103 US cent levels overnight alongside a late bounce from US equities.

Although risk trends will remain a primary directive for the local unit, the domestic week ahead will see inflation and Chinese manufacturing data a primary influence. The RBA’s preferred measure of inflation – the trimmed mean and median – which excludes the most volatile prices on the scale, are both expected to record 0.6 percent growth on quarter, or 2.2 percent annually. Headline inflation is expected to record growth of 1-percent from 0.5 percent in the second-quarter, representing annual growth of 1.6 percent. The RBA has made clear the local inflation outlook provides “scope” for further monetary accommodation and markets have suitably priced in the chances of a November rate cut.

In a recent interview with the Wall Street Journal, RBA board member Jillian Broadbent flagged the need for a weaker currency as the mining boom comes off the boil, noting “I would hope the Australian dollar gets a bit weaker going forward as the mining boom eases off,” And then we might get a bit more of a boost from having the currency a bit lower, rather than the dampening effect of being higher.” At the very least, this suggests the high currency remains at the forefront of the RBA’s mind, however, although it may add weight to a near-term rate cut, it hardly suggests the bank will embark on a series of cuts specifically targeting the high exchange rate.

Meanwhile, the Euro avoid another meltdown overnight after Spain‘s Peoples Party – led by Mariano Rajoy – secured a win in the region of Galicia. Markets are clearly focusing on the prospect of a Spanish bailout, and any easing in political tension provides further scope for Rajoy’s ruling party. Still, hopes of a Spanish bailout may wear as Rajoy maintains a casual demeanor in spite of growing investor expectations.  “I’m not going to take into account any pressure that people might exert on me, but frankly no one is doing that,” I don’t see any European Union leader telling me I should use the mechanism the ECB has put in place.” Rajoy noted last week. Nevertheless, there’s been little in the way of catalysts to prompt a recalibration of expectations, thus providing an element of support for the Euro which remained supported above $US1.30 overnight.

After a solid start to the trading week, sentiment turned sour on Friday as investors digested a host of less-than-encouraging corporate earnings.  US markets erased much of the gains seen earlier in the week after earnings from industry heavyweights Microsoft, General Electric and McDonald’s failed to meet expectations. The S&P500, considered a broad measure of investor sentiment, fell 1.66 percent to finish the week a meagre 0.32 percent in the black.  The index was up as much as 2.48 percent on Thursday. The risk-off tone saw the US dollar’s safe haven credentials kick into gear, with the Canadian dollar leading a charge lower. The Australian dollar also succumbed to broad-based market negativity, but managed to finish the week near 1-percent in the black. The Euro also took a hit with a break to the downside of $US1.31 before finding support just above the $US1.30-figure.

Europe’s elite also wrapped up their two-day summit on Friday, and once again markets appeared to be left unfulfilled. Leaders have agreed, in principle, to implement the legal framework of Europe’s banking supervisor by 1 January 2013. The European Central Bank has been given the task of overseeing the Single Supervisory Mechanism (SSM) in an effort to support Europe’s debt ridden banks. Eventually, the SSM will have the capacity to work alongside Europe’s permanent bailout fund, the European Stability Mechanism (ESM) and provide conditional funding to Europe’s most vulnerable banks. Still, with only vague detail provided, it’s apparent there’s much to be debated concerning the finer points of the SSM, with markets keenly watching Germany and France for potential clues. While France is leading the charge for a speedy implementation, German Chancellor Angela Merkel has painted a far more tentative picture stating “There are complicated questions to clarify and we’ll see in December if we complete it or not, “for now, the political will is there.”

European leaders haven’t had the best record for expediting such initiatives, and markets are clearly expecting another elongated series of talks, meetings and summits before any finer detail comes to light. The agreement will also need to be passed through the European Council and Parliament to allow for the implementation by 1 January.

Hopes of a Spanish bailout may also be wearing thin with Spanish Prime Minister Mario Rajoy maintaining a casual demeanour despite high investor expectations. Rajoy said on Friday “I’m not going to take into account any pressure that people might exert on me, but frankly no one is doing that,” I don’t see any European Union leader telling me I should use the mechanism the ECB has put in place. Nevertheless, expectations that Spain will be the next to join the list of bailout casualties has seen significant improvements across Spanish debt markets, with 10-year yields at their lowest level in 6-months.

The local week ahead will see the release of third-quarter CPI dominate an otherwise quiet week on the data front. China will also remain a key directive for the local unit with the HSBC flash Manufacturing PMI to be released on Wednesday.  Alongside a slew of corporate earnings releases, the US week will see data on the health of manufacturing and housing remain in the spotlight, with Wednesday Fed’s policy meeting and Friday’s GDP the headline events. Across the Atlantic, European corporate earnings may also make their mark on sentiment this week with Electrolux, Volkswagen and Credit Suisse some of big names on the docket. Alongside the usual conjecture surrounding the fortunes of Greece and Spain, data from the region this week includes German and Euro-Zone PMI for both services and manufacturing and the German IFO data series – all scheduled for release on Wednesday.