The $AUD is flashing red lights

While the Euro sees a bump in a very thin market, the leading currency and Carry Trade Pair are flashing red lights.

Since FX markets opened this week...

 The EUR/USD is seeing a bump, it WON'T see a short squeeze as EUR shorts are at 2012 lows.

While the EUR/USD may be decent at tracking short term moves, mostly volatile chop lately, the bigger picture, more important AUD/JPY carry trade pair is falling as is the $AUD/USD.

 AUD/JPY (Yen) as the Yen becomes more expensive, the carry trade becomes more expensive, small moves in the FX markets lead to huge losses and gains, in this case the carry trade just became a lot more expensive, NEVER good for the market moving higher.

The AUD is falling vs the $USD as well.

Why?

You can almost guess it has something to do with China, it does have to do with Australia as well as it is their currency, but often reflects major problems with China.

In this case, Chines Flash PMI. Last week's HSBC Chinese Flash PMI was just revised lower, actually to the lowest level it has seen since March of 2009. Even the VERY opaque Chinese official reading came in disappointing. Australia added a little sting to the currency with weak Retail Sales.

Both the more reliable HSBC and official Chinese PMI are now both in contraction.

Note that the HSBC print has been in contraction since 2011, more interestingly, the Chinese data is moving closer to the HSBC data, the differential since April has declined substantially.

While the EUR/USD may not be reflecting the same disappointment that the $AUD is (thinking the PBoC will act, which they won't because of inflation), things aren't much better there either, manufacturing is faltering faster than last month's data suggested. In fact, the core, Germany (and France) are not supporting manufacturing, they are starting to see their own drag. The fall of German manufacturing will not be taken lightly, it is the reason the EU exists. More from Reuters...

As for Thursday's big event, the ECB, apparently things aren't as rosy as Draghi seemed to talk the market up (remember when it came time to act the next week, he punted). This time it appears the ECB will demand a memorandum of understanding or conditions for bond purchases in the secondary market to lower sovereign debt yields, the problem, Spain has already outright rejected any such conditions and without the country first making a plea for help, the ECB can't/won't step in even if Draghi does commit to such a plan on Thursday.

As for the task master, Merkel, she subtlety is making Germany's "conditionality" as well as the role and limits of the ECB's role known.

Merkel:
`DEBT MEANS DEPENDENCY'
EU MUST ENSURE THAT IT FIRST EARNS WHAT IT SPENDS
EUROPE HAS TO LEARN TO ONLY SPEND WHAT IT TAKES IN
TOO MANY IN EUROPE HAVE LIVED BEYOND THEIR MEANS (Without naming names...Portugal, Ireland, Italy, Greece and Spain )
And my favorite, ABSOLUTELY CONFIDENCE' ECB TO WORK WITHIN ITS MANDATE