Sterling and Yen Lead Pressure on the Dollar

The US dollar is sporting a soft profile to start the week, not being able to recover from the pre-weekend employment disappointment.  On the back of a very strong CIPS service PMI (60.2 vs 56.9 in June), sterling is being lifted by short covering ahead of this week's Quarterly Inflation Report.  The aggressiveness of the forward guidance is being questioned given that the UK economy appears to be accelerating from the 0.6% GDP reported for Q2. The $1.5400-$1.5435 area offers an important cap. 

The yen is also posting independent gains as the greenback extends Friday's losses.  The dollar fell to about JPY98.30 before stabilizing in early Europe.  A move above JPY98.80 would help lift the technical tone.  Unwinding of long New Zealand dollar short yen positions may also be playing a roll, following the recall milk recall.  The New Zealand dollar was marked down (gapped lower) in Asia, managed to recovery (fully closing the gap, but early Europe) and then turning down again, in text book technical behavior.

The Kiwi's weakness may also be lending a supportive hand to the Australian dollar ahead of tomorrow's RBA meeting.  The market is pricing in near full confidence of a 25 bp rate cut and some talk is emerging about the possibility of a 50 bp cut.  Today's data, a disappointing retail sales report (fall vs expectation for a 0.2% rise) and a disastrous service PMI reading (below 40 for the first time), fanned such talk, but it is late in the RBA's cycle and we believe officials are considerably more inclined to take two small steps than one big one.

Separately, Australian PM Rudd has set the election date as Sept 7, kicking off a 5-week campaign season.  Rudd's ascension back to the PM post has seen Labor closing the gap with the Liberal opposition.   The latest polls suggest the gap has narrowed to about 4 percentage points from the low teens.  The key economic issue is adjusting to the post-China resources boom.  This has implications for Australia's immigration policy (asylum seekers) and the carbon/mining tax.  

The euro area services PMI show a little improvement over the 49.6 flash reading (to 49.8), despite the downgrade in the German reading from the flash's 52.5 to 51.3 (still an improvement over June's 50.4 reading).  France was revised higher from the flash reading (48.6 from 48.3) and Italy and Spain continued to improve.  The most important take away is that the composite reading for the euro area is above the 50 boom/bust level for the first time since January 2012.  This is broadly in line with the ECB's expectation that a gradual recovery will take hold in H2 and this also means that the central bank is unlikely to take fresh initiatives. 

The euro's upside momentum stalled at $1.3300.  Support is seen near $1.3260.  The euro is heavier against sterling.  In the middle of last week, the euro was testing GBP0.8770.  Today it is slipping through GBP0.8650.  A trend line drawn off the early and late July lows comes in near GBP0.8630 today.  A break could signal a move toward GBP0.8550-GBO0.8580.

China's official service sector PMI ticked up to 54.1 from 53.9, though the HSBC means was unchanged. The PBOC set the yuan-dollar fix at 0.80 lower for the dollar, the most since July 11.  The dollar proceeded to sell-off another 0.85% (with a maximum of 1% allowed).  The yuan in Hong Kong, dubbed CNH, has appreciated for the seventh session, the longest streak in two years.  The 12-month non-deliverable forward rose 0.25% and is trades as a 2.4% discount to the on-shore rate.  Chinese stocks advanced for the fifth session, with the Shanghai Composite up 1%. 

Sterling and Yen Lead Pressure on the Dollar Sterling and Yen Lead Pressure on the Dollar Reviewed by Marc Chandler on August 05, 2013 Rating: 5
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