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Genuinely positive stories on the economic front are relatively rare these days, with no fewer than ten of the EU’s 27 economies in recession and Australia’s central bank forced to cut rates by 50bp yesterday in part because the non-mining economy is contracting.

Thankfully, both Germany and America continue to defy the global gloom. In the US, the manufacturing sector is expanding at a respectable pace, propelled by solid growth of both domestic and export orders. Strong automobile-demand is making a significant contribution to the upturn in manufacturing – auto sales in the first quarter were the highest for four years and auto production accounted for roughly one-half of the growth in GDP in Q1. Video:

Guest post by Forex Broker FxPro

In response to this latest batch of healthy data, the Dow Jones index last night reached its highest level since the end of 2007. Over in Europe, the German labour market continues to forge ahead, with employment up another 37K in March, the 25th consecutive MoM gain. Currencies remain generally becalmed although, with a myriad of important economic releases due over coming days, we can expect volatility to increase. Friday’s payrolls figures are critical following last month’s disappointment.

Commentary

A soggier pound. Now that the UK has officially entered recession once again, the focus is on just when the economy is likely to crawl back out. As we mentioned last week, the recession label misses the point, namely that the economy has been very weak over the past two years regardless, with growth contracting in four of the past eight quarters and the economy still more than 4% below the peak in output reached in March 2008 (in real terms). That there have been two consecutive quarters of contraction is not of great significance economically. At first glance, the manufacturing PMI data for April suggests there is little prospect of the economy emerging from its slumber any time soon. The headline outcome came in at 50.5, from a (downward) revised 51.9 in March. Within this, there was a notable drop in export orders, with the new orders balance falling to 49.2. The perception is that the slowdown in the eurozone is starting to hurt the export sector. Sterling has been under modest selling pressure over the last couple of days following a good run. The question for this month is the extent to which sterling can de-couple from events in the eurozone and yesterday’s PMI data suggest that could be tough.

Tokyo annoyed by fresh yen strength. Despite some aggressive easing measures undertaken over the past couple of months, Japanese policy-makers will no doubt be annoyed by the consistent strengthening of the currency. Yesterday, USD/JPY fell to 79.64, a two-month low and just above the 100d moving average. Back in mid-March it was trading above 84.0. There are a number of explanations for the recent spurt of yen gains. Firstly, the dollar has been drifting downwards over the past few weeks – the dollar index for instance has fallen 1.5% since early March. Secondly, with Europe back in the spotlight (especially Spain), some investors have been seeking out safe-havens. For the quarter to date, the Japanese currency is the strongest of the majors, up nearly 3% against both the greenback and the Aussie and 4% vs. the euro. The MoF is understandably grumpy about recent developments, although it will concede that the yen has depreciated by 4-8% against other major currencies so far this year. With a massively enlarged intervention war-chest at its disposal, the MoF may well instruct the BoJ to undertake some night-time intervention raids fairly soon in order to prevent any sense of inevitability regarding yen appreciation starting to manifest itself in forex markets. Indeed, it is entirely plausible that the weakness in the yen witnessed yesterday and overnight might just be because of the BoJ’s omnipresence.