Much Data, Little Price Movement in FX

The US dollar is narrowly mixed against most of the major and emerging market currencies as the North American session begins. The MSCI Asia Pacific Index was off fractionally, while European bourses are higher, with the Dow Jones Stoxx 600 up a little more than 0.5%. Benchmark bond yields are also generally firmer.

There has been a slew of data and much of it seems more important than the relatively muted market reaction would suggest.

1. China's flash manufacturing PMI (HSBC)slipped to an 11-month low of 47.7 from 48.2. The components were also poor, with employment below 50 for the 4th consecutive month and at 52 month lows (47.3). Output was at 10-month lows and new orders 11-month lows. The world's second largest economy continues to slow.

2. Australia's Q2 CPI was reported in line with expectations with the headline and trimmed mean rising 0.5% on the quarter and 2.2% year-over-year. We suspect that the central bank will be relieved that the depreciation of the Australian dollar has not fueled stronger price increases and that the scope to cut rates as early as next month remains in place. The inflation data and the Chinese news has seen the Aussie reverse lower. It is posting an outside day, having traded above yesterday's highs initially and then retreating to below yesterday's lows. From a technical perspective, a close below yesterday's lows (~$0.9223) would be a bearish development.

3. Japan's June trade balance was in deficit for the 12th consecutive month. On a seasonally adjusted basis is fell to JPY599 bln from JPY778 bln in May.  Exports slowed to a 7.4% year-over-year pace from 10.1%, while imports rose 11.8% from 10.1%.  Of note, exports to the US surpassed exports to China and exports to Europe picked up.  

4.  The pick up in exports to Europe is consistent with the flash PMI reading for the euro area, which shows the cyclical recovery is intact and composers at Markit opined that today's flash readings are consistent with positive growth in Q3 (albeit modest at 0.1%, growth rather than contraction nonetheless).  The flash manufacturing PMI rose to 50.1 from 48.8 and surpassing expectations of a 49.1 reading.  The flash service PMI rose to 49.6 from 48.3, easily besting the 48.7 consensus forecast.  The composite rose to 50.4 from 48.7.  It is the fourth consecutive increase and the first reading above the 50 boom/bust level since January 2012.  

German manufacturing rose to 50.3 from 48.7 and while the service component rose to 52.5 from 51.3.  France also showed improvement, though both readings remain below 50.  Manufacturing rose to 49.8 from 48.3 and services rose to 48.3 from 46.5.  

The data is consistent with the ECB's expectation for a gradual recovery in H2 and this means that there is unlikely to be additional monetary support via a lower refi rate or a negative deposit rate unless the economy falters.  

The euro is firm, but shows little momentum.  It is holding above previous resistance near $1.32, which now acts as support.  It has tested $1.3255, but the high does not appear in place and the next objective is near $1.3275.  The longer the euro remains above $1.3200, the more likely is a move closer to $1.34.  

5.  The UK's CBI monthly trends survey was a bit stronger than expected (-12 vs -15), but it being overshadowed by tomorrow's estimate of Q2 GDP.  Most estimates are in the 0.6%-0.8% range.  In each of the past three years, the UK has reported a quarter of relatively strong growth, but it has been as if the economic engine just won't catch.  There is somewhat greater optimism this time, but there is much work to be done for the UK to even match its pre-crisis size.  Sterling for its part is trading with a slightly heavier bias today.  

6.  A much stronger than expected retail sales report yesterday has underpinned the Canadian dollar.  The US dollar has been pushed below CAD1.03 and is at its lowest level in a little over a month.  It is testing a trend line drawn off the mid-May and mid-June lows and comes in today near CAD1.0280.  A break would signal a test on CAD1.0150-CAD1.0200.  

7.  Mortgage applications in the US fell  for the sixth consecutive week and, with one exception, have fallen consistently since early May.  The backing up of mortgage rates appears to be cooling activity.  New home sales and the flash Markit PMI (manufacturing) are reports of the day.  

8.  Separately, sparked by piece on the Washington Post's Wonkblog, there is heightened speculation that Larry Summers is the leading candidate to replace Bernanke at the helm of the Federal Reserve.  There has been such talk circulating for several weeks.  Yellen, the Vice Chairman, has been widely thought to be the odds-on favorite.  Color us skeptical, though we recognize that there is no precedent for the number 2 to become number 1 at the Fed.  We had thought that most of the talk about Summers was emanating from his supporters, trying to create a buzz.  

We also suspected that the emergence of another candidate is almost necessary, as the front runner often does not get the nod.  In addition, we are under the impression that in terms of leadership style and temperament, Summers is at odds with the Fed's culture.  Lastly, we think a fair reading of the conditions that led to the financial crisis, would include much of the deregulation that Summers had helped foster when he was at the Treasury.