Contrasting data releases underscore the reemergence of the dollar
bullish divergence meme that had appeared to stall in the vacuum of economic data in the first half of
the week. Yesterday's unexpectedly large fall in US
weekly initial jobless claims had seemed to put a floor under the dollar. Moreover,
today's poor flash PMIs for China and the euro area drove home the
point.
The
Caixin/Markit (formerly HSBC) flash manufacturing PMI for China fell to a
15-month low of 48.2 in July from 49.4 in June. The market had looked for a small
increase. Many participants cast a skeptical eye on China's estimate of
7% Q2 GDP, and today's report strengthened those doubts. The data also
appeared to have spurred the reversal in local shares. The Shanghai Composite
had been up as much as 1.3% but finished 1.3% lower. It is up almost 3%
this week. The Shenzhen Composite was off 1.3% today as well, though is
up 6% for the week. Encouraged by officials, margin use jumped 1.3% yesterday
(reported with a day lag), which is the largest single-day
rise since early June.
The
disappointing economic news from China weighed on commodity prices and the
Australian and New Zealand dollars. Also,
S&P warned that fiscal deterioration could jeopardize Australia's AAA
rating. The Aussie has been sold to
new multi-year lows near $0.7270 after the attempt to rally faded yesterday
after briefly popping above $0.7400. The
short-squeeze that lifted the New Zealand dollar on the back of the absence of
bearish fx statement when the RBNZ delivered its second 25 bp rate cut in five
week was sold into yesterday and today's losses complete the reversal of those
gains.
Europe's flash
PMIs also disappointed. The flash manufacturing PMI slipped
to 52.2 from 52.5. The market had expected a flat report. The flash
service PMI slipped to 52.8 from 54.4, which is twice the decline the market
expected.
Both Germany
and France disappointed. The German manufacturing PMI eased
to 51.5 from 51.9. It was supposed to have been unchanged. The service
PMI fell to 53.7 from 54.2. The consensus was for 54.0. The French
manufacturing PMI fell dropped back below the 50 boom/bust to 49.6 from 50.5. The market had expected a small rise.
The service PMI fell to 52.0, the lowest since April, from 54.1.
The developments in Greece may have had a bigger knock-on effect than
economists had anticipated. On the other hand, the cyclical recovery,
while intact, does not appear to be accelerating. This is what Draghi has warned of due to the lack of structural
reforms.
There are two
events today in Europe to note. The first is that the official
creditors (IMF, EC, and ECB) are
returning to Athens today for the first time in several months. This is
part of the assessment needed to begin negotiations for a third package.
In addition to the near total climb down by the Syriza-led government,
the creditors are placing more demands on Greece. The focus has shifted from the VAT and pensions to labor laws and
restrictions products and professions. These include the creditors’
demands to weaken collective bargaining and open up sectors, such as milk and
bread sales, to greater competition. Protection for some professions,
including ferry transports are to be relaxed.
The second
involves the protracted negotiations for a debt relief in Ukraine. It has a $120 mln interest payment
due today. There had been much speculation that it could default today.
However, reports indicate that the payment was made. To secure IMF
funding, Ukraine must reduce its debt levels. Ukraine has proposed a 40%
haircut to its private creditors who have balked. Instead, the private creditors
want Ukraine to use its reserves to service the debt. The IMF and the US
have sided with Ukraine. In fact, the IMF had seemed to be prepared to loan to Ukraine even if it
defaulted to the private creditors under a program called "lending into arrears." The IMF will meet on July 31 to discuss its next step.
The Ukraine
economy has imploded. It has lost nearly quarter of GDP,
which is similar to Greece, but in a shorter period. However, unlike Greece, Ukraine also has high
inflation. With the denominator being crushed,
and new debt being taken on, the debt/GDP ratio is near 160%. However, the geostrategic importance is more widely
recognized that Greece's (despite my efforts see this Financial Times op-ed),
and international officials are more sensitive to linkages between the economy
and the support for a democratic pro-Western government.
The North American session
features the US flash Markit manufacturing PMI. It
is expected to be flat at 53.6. June new
home sales are expected to have ticked up, and even a small gain would bring
sales to their highest level since 2007.
Existing home sales, a much bigger market of course then new home sales, rose more than expected (3.2%
vs. 0.9%) when reported earlier this week. The Federal Reserve will likely acknowledge in
its statement next week that the headwinds from the housing sector continue to
diminish.
While the dollar is better
bid going into the weekend, the euro is finding support ahead of $1.0920. There are chunky options expiring
today: $1 bln at $1.0850, $1.2 bln at
$1.09 and $1.3 bln at $1.10. Sterling
has been under-performing this week and
the disappointing retail sales yesterday (-0.2% instead of up 0.4%) has kept it
on the defensive. The $1.5520 area
blocks the upside while support is seen
near $1.5450. The dollar has been confined to less than a quarter of a yen
range. Resistance is pegged at JPY124.20.
Contrasting Data Lifts Greenback
Reviewed by Marc Chandler
on
July 24, 2015
Rating:
Reviewed by Marc Chandler
on
July 24, 2015
Rating:
