Soft Dollar Tone As China’s PMI Slows First Time In Five Months

from the BBH Currency Strategy Team

The US dollar extended its Wednesday’s losses after softer bond yields prevailed following yesterday’s successful auction and light volume weighed on the dollar’s tone. The euro traded on a supportive footing throughout the session after breaking through the 20-day moving average of $1.3222. Although, the persistent move out of the dollar and into the Swiss franc may hamper further euro upside. The Swiss franc traded at record highs against the euro and the greenback in thin year-end trade, as euro-zone debt concerns and softer US yields have boosted demand for the franc. Uncertainty about the growth prospects for the UK has led sterling to underperform the rest of the G10 on the day, while supporting a firmer EUR/GBP. Elsewhere, the Australian dollar (which has been underpinned by the demand for higher-yielding currencies and commodity prices) fell back after its move up to a 28-year high of A$1.0198.

Italian December business confidence jumped to 103.0 from 101.7 in the previous month, beating consensus estimates of 102.In fact, this is the highest reading since February 2008. The breakdown showed the reading for total orders rising to -18 from -22, mainly on an improvement on domestic orders inflow. Inventories are falling, but the production outlook eased somewhat to 13 from 14. Still, a very strong number overall and important for sentiment since Italy accounts for nearly 17% of euro-zone GDP. On balance, with robust confidence in other key euro-zone countries this data confirms that the recovery continues (for the time being at least) even though growth trends are slowing down somewhat and are likely to weaken more so in 2011 as austerity measures take effect. The euro-zone December retail PMI rose to 52.9 from 51.3 in the previous month, suggesting expansion in the retail sector, driven by Germany and France.

China’s December PMI released by HSBC eased to 54.4, slowing for the first time in five months. Despite the slowdown the reading still remains at expansionary levels (above 50) after it had slipped to 49.4 in July – lowest since Q1 2009. The PMI remains in the middle of this year’s range, after having rebounded to 57.4 in January 2010. Meanwhile, the December print showed easing in the production and new orders components, while the input cost sub-index moderated to a 3-month low of 72.3 from 80.8, but reflected continued upward price pressure. Japan’s December PMI firmed to 48.3 from 47.3 in November, highest since September, but below the neutral 50 level for a fourth straight month after 14 months above 50. This comes amid signs that the export-dependent Japanese manufacturing sector is regaining traction at year end, after the rebound from the early 2009 trough and the weakness experienced from March to September of this year.

Peripheral bonds yields have softened a bit with Greece and Spain’s 10-year yields up only 1bp on the day. Yet, yields on Italian government bonds and notes auctioned today rose compared with the previous sale. The 2.25% November 2013 BTP raised EUR3bln at a gross yield of 3.25%, up from 2.86% on Nov 29, but drawing a similar cover of 1.4. Meanwhile, German and French 10-year yields are down nearly 5bp as investors purchased safe-haven bonds following Italy’s tepid bond auction. Elsewhere, Taiwan’s central bank raised its benchmark rate to 1.625% from 1.500% in line with consensus expectations.

Global equities are mixed in very quiet trade with European stocks soft while Asian equities remained firm. US index futures point to a weaker opening.

US data out today are initial jobless claims (415k expected vs. 420 previously), Chicago PMI (4,084k expected vs. 4,064 previously) and pending home sales (+0.8% m/m expected vs. +10.4% previously).