Plenty of News, Limited Price Action

The US dollar remains on its back foot against the euro and sterling, but is firmer against the yen and is little changed against the dollar-bloc currencies. The news stream is full, but in many ways confirms what has already known or appreciated.

Sterling's impressive gains off $1.70 yesterday have been extended with the help of the June manufacturing PMI that stands at a 7-month high (57.5 vs. 56.8 expected after 57.0 in May). Sterling is now trading at its best level since 2008 against the dollar. The next immediate target is near $1.7175.

The euro zone PMI stands in contrast, and this may have helped push the euro through its two-week uptrend against sterling. The mid-June low was set near GBP0.7960 and is the proximate target. Against the dollar the euro continues to knock on $1.37, around where option barriers are thought to be struck.

The euro zone PMI was disappointing as the flash 51.9 reading was revised to 51.8. Germany was revised to 52.0 from 52.4. This and the unexpected 9k rise in the unemployment ranks is consistent with recent sentiment indicators suggesting that the European locomotive is losing some momentum. This has not been offset by stronger performances elsewhere. Even with the pleasant surprise from France, which saw the final manufacturing PMI tick up from the flash report, at 48.2, it is nothing to get excited about.

Italy disappointed. The manufacturing PMI slipped to 52.6 from 53.2. With the flash CPI of 0.3% (year-over-year), it does not appear that the economy is getting traction. Confindustria cut its 2014 growth forecast to 0.2% from 0.7% last week. Prime Minister Renzi is seeking forbearance from the EU on the budget, not out of strength, but necessity. With the lack of economic momentum, it will be difficult to achieve the 2.6% deficit target this year. Again we note, that although the talk of "secular stagnation" rose in the context of the US economy, it seems more applicable to large parts of Europe, including Italy.

Spain, on the other hand, surprised to the upside. The manufacturing PMI rose to 54.6 from 52.9. The divergence between Spain and Italy is noteworthy. Prime Minister Rajoy has not vocally joined Hollande and Renzi in the push against the EU's fiscal mandates.

Japan’s Tankan survey was mixed. Sentiment among the large businesses deteriorated more than expected, but the capital investment plans accelerated to 7.4% from 0.1% previously and above the median expectation for around a 6.0% increase. Separately, Japan reported the first increase in base pay in two years, which is a step in the right direction. However, overall wages, including overtime and bonuses are steady at 0.8% year-over-year. This lags inflation and, we suspect, to be a critical reason the sales tax increase may have a greater impact that the Abe government seems to recognize.

Lastly, we note that Abe’s cabinet has endorsed the controversial reinterpretation of the Constitution to allow participate in collective military action. This greatly expands Japan’s military options and relaxes limits on its participation in UN “peace-keeping” missions. Yet, its primary motivation appears to be the rising tensions in the South and East China Seas.

The Reserve Bank of Australia met and as widely expected, kept rates on hold. Its subsequent statement failed to break new ground. With the manufacturing PMI slipping to 48.9 from 49.2 and the employment index at 45.5, the economy is struggling. The bright spot is that export sub-index is above 50. The Australian dollar appeared to get a better lift from the uptick in the China’s PMI. As expected, it rose to 51.0 from 50.8, which is the highest so far this year.

The Australian dollar reached a new high for the year, just shy of $0.9465. Demand from Japanese investors, who have stepped up their foreign bond purchases appears to be playing an important role here. There is new market talk that the Aussie could be headed toward parity ($1.00), but this seems to be a stretch. There is much wood to chop before then, with chart resistance now seen in front of $0.9500 and, even more formidable near $0.9750.

There are a few other developments to note. The Ukrainian government formally ended the unilateral cease-fire and indicated its counter-insurgency efforts will be re-invigorated. An estimated 27 Ukrainians were killed, and 70 wounded during the 10-day cease-fire. Russian bonds and stocks are marginally weaker in response, but the currency has been hit relatively hard. The rouble is off 0.8% and is the poorest performing emerging market currency today and, with a 1.4% loss over the past five sessions, is the poorest performer over the period as well.

Bulgarian shares have rallied almost 3% today, following news of EU approval to provide more state assistance to stem a run on its third largest bank (following the recent “attack” on the fourth largest bank. The runs appear to be politically, not economically motivated.

As expected, Turkey’s Prime Minister Erdogan will run for President in next month’s election and is the easy favorite.

Finally, we note that BNP shares have rallied in the aftermath of the US fine and sanctions. The shares gained as much as 4.5% earlier today, the most in a year. The record fine levied and the suspension of dollar-clearing privileges for a year appear to have toughened its resolve. The bank said it would not impact its dividend or corporate strategy. We note that at least two other large French banks are under investigation violating a similar financial embargo against several countries.

Plenty of News, Limited Price Action Plenty of News, Limited Price Action Reviewed by Marc Chandler on July 01, 2014 Rating: 5
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