Despite Upticks Euro Still Fragile

The euro is advancing for a second day after recording new 4-year lows on Tuesday. It is moving above a 5-point downtrend line in place for the past month. It comes in near $1.2262 today.

The two main reasons we have been negative the euro are intact. The European crisis is not over. One indication of this is that overnight deposits at the ECB reached a record high yesterday or 320.4 bln euros (almost $400 bln). Those overnight deposits have been above 300 bln euros for the past five sessions. Three-month Euribor reached a new high for 2010 yesterday. In contrast note that 3-month Swiss franc LIBOR is slipping to a new record low of a little more than 9 bp. The second factor is positive developments in the US. Expectations for tomorrow’s jobs report are creeping higher, underscoring the growth differentials that favor the US.

Comments by director of the US Census Bureau fanned hopes for a strong employment report. He warned of a significant rise. According to MNI, he revealed some methodological insight. Census employment as of the week of May12 is counted and compared with what it was a month ago. For example, the change from mid-March to mid-April was about 60.6k and in the April jobs report the census workers were estimated 66k. The gain from the middle of April through the middle of May is a little more than 417k. This suggests risks are to the upside of the already heady (Bloomberg) consensus of 515k, which has been creeping up in recent days. Pointing in the same direction is the Monster survey, which has risen for four consecutive months and now is at the highest level since Nov 2008. The employment component of today’s non-manufacturing ISM and the ADP data will see last minute tweaks in forecasts.

Europe, of course, has already reported the non-manufacturing PMI for May. It generally fared better than the manufacturing reading. Overall, for the euro-zone the May reading was 56.2, an advance from the 55.6 reading in April. While most countries showed improvement, Italy was a notable exception.

The euro failed to make much headway on the news, but it did appear to weaken following news that April retail sales fell 1.2%. This was much worse than the 0.1% gain the Bloomberg consensus expected and was not really blunted by the upward revision to the March series from flat to +0.5%. Pundits want to attribute the significant miss to the European debt crisis and the rising unemployment rates. While there is little doubt that these played a role, it is possible that underlying story is not as complicated. Easter fell early this year. Among most of the major industrialized countries this appeared as stronger consumption figures for March and weaker in April. Thus, while we recognize the powerful head winds on the euro zone’s growth, April retail sales exaggerated that weakness. Separately, the UK's CIPS reported a slightly disappointing serivce PMI of 55.4. This compares with 55.3 reading in April and a consensus guesstimate of 55.7. Sterling did not seem to respond. While the euro rose through yesterday’s highs, sterling did not. There is some thought that the Pru/AIA unwind is complete and some speculation that AIA may have another suitor.

Japan’s DPJ is set to pick its new head and therefore the next Prime Minister tomorrow. There appears to have been some jockeying for position, but current Finance Minister Kan is coming out ahead. His main rivals were the foreign minister and transportation minister and both have declined to compete. Although there is a lower house MP who may contest, it seems that the senior party members have pulled together. At the end of the day, little is likely to change in Japan. The DPJ could very well lose the majority in the upper house, but it will still govern as it controls the more powerful lower house. Kan is a long advocate of a weaker yen to help fight deflationary forces and he is likely to increase the pressure on the BOJ to take more measures as well. There are three steps the BOJ may contemplate: buying more JGBS, increase the duration of the emergency 3-month lending facility put in place last December and expanded earlier this year, and creation of a new lending facility. The dollar has risen above the JPY92.30 area and this should now offer support. The next target is JPY93.30 and then the year’s high set in early May near JPY95.00

Australia unexpectedly reported its first trade surplus since April 2009. The A$134 mln surplus in April was a function of a 10.7% jump in exports, vs 1.4% in March and a 0.1% rise in imports vs a 3.1% gain in March. The low import figure conceals a 1% rise in capital goods imports, which seems to suggest strong domestic demand. The Australian dollar is best performer this week, up more than 2% against the dollar. Support is seen near $0.8450.
Despite Upticks Euro Still Fragile Despite Upticks Euro Still Fragile Reviewed by Marc Chandler on June 03, 2010 Rating: 5
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