US ISM Index Falls; Euro Zone Credit Outlook Downgraded; RBA On Hold

The major economic data release of the day came from the US, as the ISM index of manufacturing output was released this morning.  The index fell to 49.6 for the month of August, indicating a contraction in activity for the month.  This received muted reaction from markets as equity markets traded slightly to the downside and the USD remained relatively flat versus it major counterparts.

The euro zone as a whole had its credit rating outlook downgraded this morning, as the impact of strong countries such as Germany and France put their balance sheets behind Spain, Italy and Greece continues to weigh upon the region.  Investors may become less willing to fund Germany and France at these low yields should they pledge to support the tattered balance sheets of the EU’s weakest nations, however the EUR largely ignores the news and continues to trade higher in the market on the hopes for central bank intervention.

The Royal Bank of Australia kept interest rates unchanged at 3.5% in their latest decision.  The central bank remains cautious in its outlook for global growth and the market anticipates that this view will likely mean a decreasing chance of near term hikes in the overnight rate, which is positive for a currency.  The AUD continued its recent decline and hit a low of 1.0220 versus the USD today.

Chart of the Week: Volatility Rises (CBOE VIX OPTIONS INDEX)

The chart below is the markets expectation of future stock market volatility as measured by the CBOE VIX INDEX.  Higher expectations for volatility are usually associated with USD strength as traders get out of riskier currencies and assets that may experience wild swings in valuation.  The index has clearly risen from recent 4-year lows and this should be an indication that markets are expecting larger moves across assets this month.   During such times the USD tends to have broad outperformance versus commodity linked currencies such as the AUD and CAD.   Talk to your account manager to discuss the tools available to protect your exposures.
  


Source: Sungard 2012