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Five Important Developments, but Mostly Muted Action

There have been five important developments today, but price action has been mostly limited.  Confirmation that the Reserve Bank of New Zealand is pausing after hiking rates for the fourth consecutive time has sent the New Zealand dollar sharply lower.  The disappointing UK retail sales report has spurred an extension of the profit-taking seen in sterling in recent days. Sterling made a marginal new low for the month as it tested the $1.70 level.  Despite other developments, the other major currencies are little changed.  

Macro funds and leveraged accounts were thought to be the featured Kiwi sellers.  The 1.3% drop today is the largest single day loss since last October and has brought it back to levels seen in the first half of June.  More importantly, with today's sharp decline, the uptrend line drawn off the early-February and early-June lows have moved into view.  It comes in today near $0.8540.  

The Kiwi's losses and the stronger than expected HSBC flash China manufacturing PMI has lifted the Australian dollar on a trade-weighted basis, but not against the  US dollar.  Against the New Zealand dollar, the Aussie is through its 200-day moving average (~NZD1.0875), which has tended to be an important barrier.  The next target is near NZD1.1040.  On a trade-weighted basis, the Australian dollar is near a 12-month high.  

HSBC's flash PMI rose to 52.0 from 50.7.  This is an 18-month high and well above expectations for a 51.0 reading.   Of note, output stands at 16-month high, while forward looking new orders rose its highest level in a year and a half.   This is further confirmation that the world's second largest economy has stabilized.  

News from the world's third largest economy was not as favorable.  Japan's trade deficit (unadjusted) was larger than expected.  Exports were weak and unexpectedly On the other hand, imports showed no sluggishness.  declined by 2% following May's 2.7% decline.  The consensus called for a 1% increase.  It is the first back-to-back decline in Japanese exports since late 2012.  Of note, while exports to China increased 1.5% from 0.4% in May, exports to the rest of Asia faltered.  Overall, Japanese exports to Asia fell 3.8% after the 3.4% decline in May.  Similarly exports to the US fell 2.2% following the 2.8% previously.  

They jumped 8.4% after the 3.6% decline in May.  Mineral fuels, which account for almost a third of Japan's imports rose 8.3%.   Japan is getting closer to re-starting a couple of nuclear plants and over time this is anticipated to reduce imported energy, though it will be a slow process and does not address the sluggishness of exports. 

Separately, Japan’s manufacturing PMI (Markit/JMMA) slipped to 50.8 from 51.1 in June.  The consumption tax increase has sapped domestic demand, while as we have seen, foreign demand for Japanese exports remains weak.  We have been under the impression that the Abe government was willing to “write-off” economic weakness in Q2, following the retail sales tax increase.  However, official expect a rebound in Q3 and today’s data raises questions about it. 

The US dollar made a marginal new high against the yen near JPY101.65.  The greenback has been confined to less than half a yen range this week.  While the latest upticks are encouraging if one is looking for a breakout, but the JPY101.80-JPY102.00 may be a formidable resistance, especially with 10-year US Treasury yields seemingly stuck below 2.5%.  

Turning to Europe, June UK retail sales disappointed.  Rather than post a strong rebound from the fluke 0.5% decline in May, it was halfhearted at best with a 0.1% rise.  Excluding autos, UK retail sales fell 0.1%.  There was a concern expressed in the MPC minutes that the UK economy may slow in H2 and weakness in June retail sales plays on such worries.   Still, some of disappointment stemmed form a decline in clothes sales, which may have been delayed rather than abandoned.  Although sterling slipped lower on continued unwinding of the stale longs, the March 2015 short-sterling interest rate futures contract was unchanged.  We have anticipated sterling bottoming between $1.6950 and $1.7000. 

A stronger than expected euro area flash PMI helped lift the single currency back above the uptrend line drawn off the 2012 lows that had been violated earlier this week.  In fact, prior to the release, the euro had slipped to just below $1.3440 for a new 2014 low.  While a move back above $1.3470 is constructive, a move above $1.3500 is needed to really begin repairing the technical damage. 

The flash composite reading for July jumped to 54.0 from 52.8.  Manufacturing was unchanged at 51.9.  The improvement came from services, which rose to 54.4 from 52.8.

Just as worries over the stagnation of the German economy were underscored by the Bundesbank’s monthly report, the largest European economy saw its manufacturing PMI rise to 52.9 from 52.4.  The consensus had feared further pullback to 52.0.  Services, traditionally not a strong suit for Germany, rose to 56.6 from 54.8.  This is the strongest reading in 3 years. 


France’s service sector improved with a 50.4 reading after 48.2 in June.  It is the first reading about the 50 boom/bust level since April.  However, the manufacturing sector did not fare nearly as well.  Indeed, it slipped to 47.6 from 47.8.  It is a new low for 2014.  

The North American session features weekly initial jobless claims, new home sales, and the flash Markit PMI.  These reports typically are not market movers.  Look for the dollar to consolidate the price action seen in the Asian session and the European morning.  


Five Important Developments, but Mostly Muted Action Five Important Developments, but Mostly Muted Action Reviewed by Marc Chandler on July 24, 2014 Rating: 5
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