Currency Rotation Lifts Dollar-Bloc, Norway and Sterling, Weighs on Euro and Yen

The US dollar begins the fourth quarter on a mixed note.  The dollar-bloc currencies are trading higher, helped by stabilizing commodity prices and the slightly better than expected Chinese manufacturing PMI (49.8 vs 49.6 expected after 49.7 in August).  Australia's manufacturing PMI also ticked up to 52.1 from 51.7.  Sentiment toward the dollar-bloc has improved.  Technically, it looks like the Antipodeans and the Canadian dollar put in near-term bottoms.

The better than expected July GDP figures from Canada yesterday helped solidify ideas that the central bank's mini-easing cycle (two rates cuts this year) is over.  The US dollar set new 11-year highs near CAD1.3460 earlier this week and now is pushing lower.  Initial support is seen near CAD1.3235 but look for CAD1.3180. A break of this latter area could spur a re-test on the CAD1.30 area.  

The Australian dollar's near-term technical tone is also improving.  A potential double bottom near $0.6940 suggests potential toward $0.7150.  The New Zealand dollar needs to overcome the $0.6450 area to raise prospects for a move toward $0.6580.   

Sterling's nine-day declining streak may be snapped today.  The manufacturing PMI came in at 51.5 while this is slightly lower than the August reading (51.6), it was better than the 51.3 consensus forecast.  In this nine-day drop, sterling has fallen 5.2 cents to just below $1.5110.  Sterling suffered another nine-day decline in late-August through early-September.  Then sterling lost about 6.5 cents to $1.5165. 

To be sure, the technical tone is still fragile.  Sterling recorded an outside down day yesterday. While there has not been any follow through selling today, upside momentum, a snap-back, has yet to materialize.  A narrow range has prevailed, and sterling struggles near $1.5150.  To lift the tone, a move above the $1.5200-15 area is needed. 

Japan's Tankan was soft, but not sufficiently so to boost speculation that the BOJ could ease as early as next week.  Sentiment among the large manufacturers declined (12 from 15) while the large non-manufacturers reported unexpected improvement (25 from 23).  Sentiment among the small producers held up better than expected.  Importantly, capex plans were lifted to 10.9% from 9.3%. The consensus warned of a decline to 8.7%.    Separately, we note that the manufacturing PMI edged to 51.0 from the 50.9 flash reading.  

The dollar continues to coil against the yen. It has been confined to half a yen range today.  The symmetrical triangle that has been traced out since late-August is found at about JPY119.30 and JPY120.45 today.  The Nikkei rallied almost 2%, but JGBs also rallied.  The generic 10-year yield slipped three bp to 32.5 bp.  It fell to within half a basis point of the lowest level since April.  

The euro has been sold to marginal new lows for the week near $1.1135.  Last week's lows were in the $1.1105-15 area.  Important support is seen just below $1.1090.  

The manufacturing PMI for EMU was confirmed at 52.0, where the flash report had it.  The details were a bit disappointing, however.  The pullback in Spain and Italy was a bit larger than anticipated.  Spain's manufacturing PMI fell to 51.7 from 53.2.  The consensus was for 52.9.  Italy's PMI was above Spain's for the second month at 52.7, but this is down from 53.8 in August.  The consensus was for 53.4.  Germany's flash 52.5 reading was revised to 52.3.  France continued to surprise on the upside with a 50.6 final reading after the 50.4 flash.  

Among the Scandi's Norway's manufacturing PMI surprised on the upside, rising to 47.3 from 43.3. While this is still below the 50 boom/bust, it was understood to be a positive development and Nokkie went bid.  The euro fell to new lows for the week against the krone.  The losses approached a 50% retracement of the euro's gains in the wake of the rate cut that surprised many participants. Support is seen near NOK9.4145

Sweden's manufacturing PMI ticked up to 53.3 from 53.2, but the market had been looking for more (54.0).  The Riksbank reaction function is more sensitive to deflation than to the firmer growth prospects.  The decline in raw material prices may mean more to the central bank than the small rise in the PMI, and the krona is under-performing today.  

Ahead of the monthly jobs report, the US calendar is busy today.  The Challenger report on layoffs and the ISM/PMI data will be scrutinized for insight into the employment report.  September auto sales are expected to hold above the 17 mln annualized unit mark for the third consecutive month, though may ease sequentially.  Two Fed officials are speaking--Lockhart and Williams--both of whom are among the broad Fed consensus, seeing a rate hike this year as appropriate.    After the North American markets close and in early in Asia's Friday session, ECB President Draghi will speak in NY.  

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