Weak Economic Reports Send Dollar Higher
The US dollar is recouping some of its recent losses against most of the major and emerging market currencies. Softer than expected New Zealand GDP, followed by the disappointing euro zone flash PMI, the renewed widening of interest rate spreads in Europe and heavier tone in the equity markets appears to have helped spark what appears to be largely corrective price action in the foreign exchange market, with the euro and dollar-bloc absorbing the bulk of the pressure. The dollar is consolidating yesterday’s losses against the yen, but has shown little impetus to recover. It has been confined in boring 15-tick range around JPY84.55. Sterling is also holding on to its recent gains better than the euro as it too benefits from the shake out of some late euro longs. This euro pullback is likely to be seen as a better buying opportunity by New York traders.
Besides the major Asian equity markets being closed for Holiday, other Asian stocks were mixed today. Asian mining stocks rose after an increase in base metals. In particular, the MSCI Asia Pacific Index was down 0.07% from a 0.62% gain the previous day. Stocks were mostly up in Taiwan led by an increase in consumer services and industrials. The present relative strength of Taiwan’s economy has made it an attractive destination for equity investors, leading to a monthly net inflow of nearly $2,182M. In Europe German stocks fell as growth in Europe’s services and manufacturing industries weakened more than expected. Although, stocks in Ireland and Sweden retreated the most in Europe, led by a sharp contraction in financials, industrials and oil & gas. Overall, the STXE 600 is down nearly 0.41% as concerns about the sovereign-debt crisis resurfaced.
In today’s European trading session, Ireland sold €100 of bills with an average yield of 2.23% with a maturity set for April 18, 2011. On the whole, Ireland auctioned €400M of bills, less than the maximum sought by the debt agency. On the back of this news and weak manufacturing data, Irish 10 year yields spiked to a record high relative to the German benchmark. As a result, this protracted selling of the periphery’s debt led to a sharp increase in the price of protection (CDS). On the supply side Germans bunds rose and its yield discount to the periphery rose after the nation said it will sell less debt than previously estimated.
The most important economic report today was the euro zone’s flash September PMI. It was weaker than expected and suggests that market participants may not have adjusted their expectations adequately after the robust growth posted by the region in Q2. Manufacturing reading came in at 53.6, down from 55.0 in August. The consensus had expected a milder pullback to 54.5. The service sector posted a steeper decline to 53.6 from 55.6, while the consensus had expected a 55.5 reading. German data was especially disappointing and this is important because it is Germany’s strength that overwhelmed the some real regional weakness in the aggregate data. Germany’ manufacturing PMI fell to 55.3 from 58.2 and the service PMI dropped to 54.6 from 57.2. Output and orders in both sectors were weak. To be sure these readings are consistent with moderate growth, but they point to the next series of reports in the weeks ahead have downside risks. In addition, the momentum is a bit disconcerting, especially if there is further deterioration before the final report is released. After rallying to its best level since April yesterday, the euro has been hit by profit-taking with the PMI data, heightened tension in Portugal and Irish bond markets provided the incentive. Since September 10, the euro has rallied 6.3%. The move accelerated following the FOMC statement. Prior to that statement, which appeared to lower the bar for additional action to no substantial increase in inflation or inflation expectations in six weeks time from a significant deterioration in the economy (Jackson Hole), the euro was trading just below $1.3150. If the likelihood of additional Fed action represents a significant shift in macro-considerations, the area should be important. More immediately, the $1.3280-$1.3300 area is likely to remain intact as the hourly momentum indicators show the euro is over-extended and those that think an important breakout is taking place will see the 1% euro pullback as a new buying opportunity.
The Australian dollar is also being hit by a bout of profit-taking today. Next to the heightened chances that the Fed provides more stimulus there has also been a notable shift in expectations regarding the outlook for Australian rates following hawkish official RBA comments earlier in the week. At the start of the week the markets appeared to have priced a bit less than a 20% chance of a hike next month. Several local banks have embraced that view now as well. The market seems to be pricing in about a 60% chance now. The wave of profit-taking today and the weaker than expected New Zealand Q2 GDP have seen the Australian dollar to around $0.9480 from a high near $0.9600 yesterday. The $0.9440-$0.9460 area, around where it was before the FOMC statement, may offer support. New Zealand’s economy expanded 0.2% in Q2, well off the 0.7% the consensus expected and 0.9% the central bank had forecast. The drought hit agricultural output and milk production. That Fonterra, the important milk cooperative raised its estimated payout to farmers for the year through May 2011, was overwhelmed by the GDP shock. It reinforces the idea that RBNZ is on hold and will continue to lag behind Australia.
Although Chinese markets were closed for holiday yesterday and today, China is very much in the news. There are two items today that will provide the fodder for market talk. First, Chinese officials are already denying a New York Times article suggesting that it is placing an embargo on rare earth exports to Japan. There rare earths are scarce metals and minerals needed for a range of modern goods, from electronics to precision guided weapons. The tension between Japan and China is currently as high as it has been in several years at least. Recently China moved to slow the export of rare earths, but this was a general move not one aimed at Japan in particular. Nevertheless the issue illustrates the uncertainty surrounding China’s behavior in the international space and the rules it will operate under. This is occurring as the Obama meets with the ASEAN members, at least several are seeking US as a counter-weight to China in a region of a number of open territorial disputes. The NY Times story feeds into the second item. The House Ways and Means Committee is expected to vote on the China trade bill today. There has been an amendment attached that would still given the Commerce Department discretion and allow compensation to businesses for the weak yuan on a case-by-case basis. The bill is expected to go to the entire House of Representative tomorrow, where the Democrat leadership is eager to have vote quickly. Even if it passes the House of Representatives, it still must be approved by the more (traditionally) deliberative Senate and signed by the President. In some ways, the House is the easiest step.
Upcoming Economic Releases
In New York’s trading session the US reports Initial Jobless Claims with the consensus expecting no change from last week. Although, a marginal drop in continuing claims is expected. In addition, Existing Home Sales in the month of Aug are expected to increase to 4.1M from 3.8M the previous month. And finally, the US will report Leading Indicators Index from the month of August, which is expected to remain unchanged.