by Marc to Market
Problems in Portugal and Greece, coupled with disappointing service PMI, have kept the euro under pressure. It is recording its first complete session below $1.30 since late May. The yen and sterling are the best performers today.
Initially in Asia, the dollar's gains ere marginally extended a little above JPY100.80, but traded in narrow ranges, until early Europe when it was sold off amid anxiety over the more general investment climate. The impetus was not coming from Japanese asset markets, where equities were mixed (Topix and JASDAQ up, but Nikkei down) and JGBs were slightly firmer. The dollar fell to near yesterday's lows (~JPY99.50). A convincing break would undermine the technical tone of the greenback.
Sterling has rallied a little more than a cent on the back of a much stronger than expected UK services PMI, which completely the week's trifecta of improving PMIs. The service PMI rose to 56.9 from 54.9, whereas the consensus had expected a small decline. The data reinforces the view that the UK economy is posting healthy growth in Q2 (~0.5%) and has momentum going into Q3. Ironically, the new governor of the central bank was picked in large measure due to his ability and willingness to innovate and deploy monetary policy in a way that is more supportive of growth. Carney's first meeting (tomorrow) was never expected to be the key event, but with the recent string of data, with price pressures still sticky, talk of exit strategies is likely to emerge. This is turn will test Carney's forward guidance tools.
The euro has been turned back from the GBP0.8600 level as anticipated yesterday. The low in Europe was set near GBP0.8490, largely meeting our GBP0.8480-GBP0.8500 objective. The initial move looks nearly exhausted, but the larger down move may not be. Initial resistance is now seen in the GBP0.8520 area. Sterling itself is posting a potential key reversal against the US dollar, trading on both sides of Tuesday's range. A close above Tuesday's high, just below $1.5240, would confirm the one-day reversal pattern. The upside objective would be in the $1.5360-$1.5400 area.
The poor price action yesterday failed to allow a low risk entry into our other trade idea of buying and Australian dollar against the Canadian dollar on a possible head and shoulders bottom pattern. Although Australia reported a better than expected trade surplus (third in a row after more than a year of deficits) was not sufficient to offset the disappointing retail sales (0.1% vs 0.3% consensus) and the RBA governor's call for a weaker currency. The Australian dollar was sold to new lows for the move, near $0.9050. This leg down in the Aussie is threatening the head and shoulders bottom against the Canadian dollar.
The euro area news stream is going from poor to worse. Political uncertainty in Portugal continues to undermine the local bond market, which is thinly traded even in the best of times. The 10-year yield is up more than 110 bp and the 5-year CDS is up almost 90 bp. The political tensions in the governing coalition complicate the Troika's review that is due to start in mid-July, a snap election may still not be the most likely outcome. If the center-right coalition member the CDS leaves, the government would have 108 of 230 seats and may try as a minority government, which may buy time over the summer. Local elections are scheduled for September, coinciding with the government's submission of the 2014 budget.
Meanwhile, one must marvel at how long Greece's three-day deadline lasts. We have been skeptical of it and recognize that the whole process has been fraught with brinkmanship tactics and that the real deadline is next week's Eurogroup meeting. We see plenty of room for innovative compromises and expect a deal will be announced at the very last moment that will allow Greece to have sufficient funds to cover a bond maturity later this month.
In terms of economic data, the disappointing service sector PMI offsets the better than expected retail sales data. Owing in good measure to the decline in the German PMI reading to 50.4 from the 51.3 flash reading, the region's services PMI fell to 48.3 from 48.6 of the flash reading. That it is still up from 47.2 in May shows that a muted recovery is still underway. France actually did better than the flash (47.4 vs 46.5), and Spain also surprised to the upside. Italy, however, joined Germany, with disappointment. Its reading fell to 45.8 from 46.5. The consensus was for a rise to 47.0.
May retail sales rose 1.0% which was much better than that 0.2% Bloomberg consensus. However, that consensus seems out of date as Germany and France had already reported much better than expected national figures.
Initial resistance in the euro is now seen in the $1.2980 area. We continue to look for the euro to test trend line support seen near $1.2850.
Lastly, we note that China's service PMI was mixed, with official one ticking down and the HSBC measure ticking up. There is no big take away from the data. On the other hand, the credit crunch has continued to ease. Although the key short-term money market rates have not completely returned to levels that had previously prevailed, the drama is over.
The North America features a slew of economic data in what will be an abbreviated session for many participants. Note that due to tomorrow's holiday, weekly initial jobless claims will be reported today. However, they will be overshadowed by the ADP jobs estimate and the US trade balance. Later in the North American morning, the service sector ISM will be reported. Separately, note that the June auto sales that trickled in yesterday came in at new post-Lehman highs of 15.89 mln annualized rate (vs 15.5 mln expected) and should bode well for June retail sales. The recovery of the US auto sector stands in marked contrast with the euro area and Japan.
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