Dollar Recovery Continues

News of Greece's political gambit, fallout from haircut that is not a default, and poor economic data have seen risk come off in a big way after last week's near euphoria. While the euro never recovered from the news of that Greece will call a referendum, news that China's official PMI fell to 50.4 in Oct from 51.2 in Sept, contradicting the HSBC version of PMI did not to risk takers any favors.

Equities are sharply lower and and financials are leading the way. Sovereign bonds spreads are widening over bunds, with Italy paying a EMU-era record premium over Germany and the French premium widened to 119 bp, within half a basis point of the Oct 24 record high.

Yesterday the euro retraced in full last Thursday's sharp gains scored in the wake of the broad euro zone agreement. Today it has extended those loses and has now retraced in two days more than 50% of the advance since Oct 4 low. This illustrates the impulsive nature of the down move compared with the rise. The 50% retracement comes in just below $1.37 and the 61.8% retracement comes in near $1.3565.

Sterling has fared better. It has not retraced even 38.2% of its gains off the Oct 6 low. That comes in near $1.5825. The 50% retracement is found near $1.5720. While the advanced Q3 GDP report was better than expected at 0.5% (0.3% expected), the CIPS manufacturing survey (PMI) came in at 47.4 from a downward revised 50.8 (initially 51.1) in Sept, The market was expecting a 50 reading and the disappointing report plays into BOE fears that the economy could contract in the current quarter.

As anticipated the Reserve Bank of Australia cut its cash target rate by 25 bp to 4.50%. The 38.2% retracement of its October rally comes in near $1.0232, coinciding with the 20 day moving average today. The market is pricing today's cut as the beginning of a sequence of cuts. The global environment and risk appetite seems like a greater driver of the Aussie than domestic considerations. It still offers among the highest rates among major industrialized economies.

Initial BOJ data suggests that yesterday's intervention was about JPY7.7 trillion yen, although local press reports suggested a figure closer to 10 trillion. The roughly $100 bln intervention is about 20% of the average daily volume in the dollar-yen pair. However, BOJ's hand was not seen today, though Japanese banks were thought to absorb dollar supply near JPY78.