Mid-Day Report: Yen Continues to Dominate as Stock Plunges on Recession Fear

The Japanese yen remains firm in early US session, follow release of poor manufacturing data from around the world. ISM manufacturing index in US dropped more than expected to 36.2 in Nov, suggesting the manufacturing industry is contracting in the fastest pace since 1982. Price paid component continued it's steep slide to from 37.0 to 25.5. Employment component remains deep in contraction region and deteriorated further from 34.6 to 34.2. Considering Manufacturing PMI from UK, Eurozone and China that hits record low, investors are deeply worried that the global economy is entering into severe recession. Dow opened lower following weakness in European stock markets and dropped over 370 points so far. Crude oil is down more than $3 and is back pressing 51 level. Gold is down over $40. Dollar index benefits from risk aversion and edges higher to above 84 in spite of weakness in USD/JPY. Other data from US saw construction spending dropped -1.0% in Oct versus expectation of -0.9%. Canadian GDP rose 0.1% mom in Sep, below expectation of 0.2%. Though, Q3 annualized growth rate came in at 1.3%, above expectation of 1.1%.

Focus will now turn to speeches from Bernanke and Paulson later today. In the coming Asian session, RBA is widely expected to cut rates again but the depth of the cut is uncertain with expectations ranging from 50bps to 100bps.

Released earlier today, Switzerland's SVME PMI plunged by a greater extent than economists expected. The index decreased to 35.2 from last month, much lower than consensus of 44.5. This is the third month in a row of contraction and the biggest drop among the three. Eurozone PMI surprisingly revised down to 35.6 (Oct: 42.9), compared with preliminary figure of 36.2. This is the lowest figure since the index began 11 years ago and the 6th month that the manufacturing index stayed below 50. Indicating deterioration in the sector, readings for manufacturing output, new orders, employment, backlogs, quantity of purchases and new export orders are all at record lows. As a geographic breakdown, the German November manufacturing PMI was revised down to 35.7 from 36.7. In October, the reading came in at 42.9. Concerning the components, both output and orders were revised down. The data increased pressure for the ECB to cut interest rate more aggressively on Thursday's meeting.

Germany retail sales unexpectedly fell for the second month by -1.6%, compared to consensus of 0.5% recovery, in October while September figure was revised from -2.3% to -1%. On annual basis, retail sales for Europe's largest economy also dropped -1.5% and September figure was revised from 1.2% to 2.4% . Although unemployment rate in Germany was still relatively low compared with it counterparts, consumer confidence was damped and saving rate was peaked in 14 years. Global economic crisis reduced spending desires for consumers.

November Manufacturing PMI for the UK also dropped more than expected to 34.4 (consensus: 39.2). This is the 7th straight month that the index showed a contraction in the nation's manufacturing sector. Readings of output, new orders, employment, backlog of work and quantity of purchases were all at historical lows. October's data was also revised down to 40.7 from 41.5.

GBP/USD Mid-Day Outlook

Daily Pivots: (S1) 1.5283; (P) 1.5355; (R1) 1.5428; More

GBP/USD's break of 1.5178 minor support indicates that corrective rise from 1.4557 should have completed with three waves up to 1.5534. Intraday bias flipped back to the downside for retesting 1.4557 low first and break will confirm that recent decline has resumed for next medium term target at 1.3680. On the upside, while another another rise cannot be ruled out, upside is still expected to be limited by 1.5600 cluster resistance (50% retracement of 1.6671 to 1.4557 at 1.5614). However, decisive break of 1.5600/14 will be the first alert that whole fall from 1.8668 has completed and strong rebound might follow targeting 1.6671 resistance.

In the bigger picture, there are some different interpretations of the structure of the whole down trend from 2.1161, with different projection targets. Main question is whether fall from 1.8668 is the fifth wave in the five wave sequence from 2.1161 (1.9337, 2.0158, 1.7445, 1.8668, ?) or it's the third wave inside the fall from 2.0158. In either case, fall from 1.8668 is possibly completing a five wave sequence of its own. Strong rebound above 1.4278/4310 cluster projection target (100% projection of 1.7630 to 1.5269 from 1.6671 at 1.4310, 161.8% projection of 2.0158 to 1.7445 from 1.8668 at 1.4278), followed by break of 1.5600 resistance will suggests that a medium term bottom is formed and bring larger scale correction. Though, sustained trading below 1.4278/4310 will target 1.3680 key long term support (01 low).

Forex News Digest

• U.S. ISM Manufacturing Index Slips Below Expectations to 36.2 in November
• Morning Market Recap: Canadian Dollar Shrugs Off Strong Q3 GDP
• Canadian Third-Quarter GDP Rebounds to Annualized Growth of 1.3%
• UK Sunday Times' SMPC Votes for BOE to Cut Bank Rates by 100 Bps
• Geithner to Leave FOMC, Says WSJ
• UK Manufacturing PMI Hits All-Time Low of 34.4 in November
• German Manufacturing PMI Revised Down, Reaches Series-Low 35.7 in November
• Euro Zone Manfacturing PMI Revised to Record Low of 35.6 in November
• German Retail Sales Unexpectedly Fall Further from September to October
• Yen Gains Against Dollar, Euro as Manufacturing Slump Weakens Yuan, Ruble
• Asian Currencies Fall, Led by Rupiah, After China's Manufacturing Shrank

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