Greenback Remains Soft

The US dollar cannot get out of its own way, it seems.  With a light economic schedule, there is little to offset the continued drumbeat of troubling political developments.  The latest turn, as reported first in the Washington Post, that President Trump asked heads of intelligence groups to also publicly deny collusion with Russia.  

We are again struck by the pattern in American politics where the cover-up is often worse than the actual malfeasance.  We are also concerned that the opposition is leaning ahead of its skis to the extent that it insist on impeachment talk before the investigations by the Senate and House have fully gotten underway.  

At the same time, in terms of sequencing, news about tax cuts, deregulation, and infrastructure spending is taking a backseat to Trump'\s budget for FY18, formally submitted yesterday.  It calls for $3.6 trillion in spending cuts over the next decade. There are few additional details from the earlier draft.  One of the features that took some by surprise was the proposal to sell half of the US strategic oil reserves.  

The proposal, which needs to be approved by Congress in order to be implemented, calls for selling the reserves starting October 2018 to raise around $16.5 bln.  The strategic reserves currently hold almost 690 mln barrels.  A sale of half over a ten-year period entails the sale of about 95k barrels a day.  This is equivalent to about 1% of the US current output.  It is also a little more than the amount that Iraq is producing in excess of its OPEC quota.  

On the eve of the OPEC meeting that looks set to extend the six-month output cuts for nine more months, oil is threatening to break the recent advance.  The July light sweet oil futures contract has advanced in four sessions coming into today and is up  10 of the past 14 sessions.  It is currently trading off nearly 1%, as is Brent.  

The tragic suicide bombing in Manchester failed to have much market impact, though the campaigns ahead of the June 8 election have been postponed.    The election has long been regarded as an easy victory for the Tories, but Prime Minister May seems to be intent on turning it into a contest.  Her seeming reversal on elderly care has unsettled some ministers, according to reports, and comes on the heels of polls suggesting the contest has tightened.    Some observers raise questions, not so much about the substance of the issue, but the leadership style of secrecy and taking significant decisions without a cabinet discussion.    In March, the government had to reverse itself too on taxing small businesses.  

Adding to the poor news stream, the UK reported a larger than expected deficit in the first month of the new fiscal year.  Government spending increased, while the pullback by consumers limited the VAT receipts.  Net borrowing was 10% above the year ago pace and 20% more than expected.  Government revenue increased 3.9%.  Spending increased 5.9%. 

Meanwhile, the drumbeat of favorable eurozone data continued.  The May flash PMIs suggest another strong quarter of growth.  The composite for the region was unchanged at 56.8, matching the multi-year high.  Manufacturing was a bit stronger than expected at 57.0 (vs. 56.7 in April), while services were a little softer at 56.2 (from 56.4).  

While the composite readings of both Germany and France rose, the details were different.  In France manufacturing slipped (54.0 vs. 55.1) while services improved (58.0 vs. 56.7).   In Germany, manufacturing improved (59.4 vs. 58.2), while service activity eased (55.2 vs. 55.4).   Separately, German reported IFO survey results which also firmed.  Business confidence is at its highest level since 1991.  

As we have noted, the problem the eurozone faces now is not growth.  In fact, that has not been the chief problem for more than a year.  Rather, as Draghi and others have pointed out, the challenge is that price pressures do not show a sustainable path toward the ECB's target.    To argue that the growth alone warrants a hike misunderstands the ECB's approach.  The ECB does not target growth or employment directly, but rather than as single mandate price stability, defined as near but under 2%.  And in fact, prices in the PMI slipped for the first time in 15 months.  

Japan's flash manufacturing PMI disappointed.  It slipped to 52.0 from 52.7.  Output fell to 52.9 from 53.4.  Both of theses readings are the lowest since last November.  New orders also fell.  However, with softer US yields and weaker Japanese shares (Nikkei -0.3%), the dollar was able to make little headway against the yen.  It has been largely confined to a JPY110.90 to JPY111.30 range.  

US economic data today includes the flash Markit PMI readings, where small increases are expected and new home sales, which are expected to ease in April after rising 5.8% in March.  Canada reports wholesale trade. The API oil inventory data will be released after the markets close.  Tomorrow the US CBO will publish its deficit scoring of the health care reform that the House of Representative passed recently.  If it projects a larger deficit in 10 years time, the chamber may have to vote on the bill again before it is sent to the Senate.  The FOMC minutes will also be reported tomorrow.  Some apparently are hoping for more insight into the balance sheet strategy, but it more likely to be seen in next month's minutes.  

We note that S&P warned that it might cut Brazil's credit rating (BB) due to political uncertainty.  Brazil says it will stick with its reforms, but many are skeptical that this will be possible if the situation continues to deteriorate.   The Mexican peso initially came under pressure "in sympathy" but has since stabilized.  

There are some chunky options expiring today.  The $1.1250 strike in the euro (780 mln euros) will be cut today.  A $1.13 strike (302 mln euros) also rolls over.  In the yen, the JPY112 strike ($633 mln today and $2.4 bln tomorrow) may help cap the dollar's upside.  Sterling strike at $1.2975 (GBP636 mln) will be cut today.  

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