Dollar is Lifted Ahead of the Weekend

The US dollar is firm as the week winds down. It had slipped through the 200-day moving average against the yen (~JPY101.25-30) in the first half of the week, to test the year's low near JPY100.80. However, arguably with the help of somewhat higher US Treasury yields, the dollar rebounded to test the JPY102 area today.

It is the euro, instead, that is breaking through its 200-day moving average today. It is found just below $1.3640 today, and on the back of a soft German IFO survey, was pushed below $1.3620. The euro has not seen its 200-day average since last September and has not sustained a break of its since last July. Aside from the psychological support of $1.3600, the next technical target is seen closer to $1.3520, which corresponds to a retracement objective of the large rally off last July lows.

The German IFO results were lower than expected and lower than the April readings, but is largely consistent with recent survey data that suggested some moderation of activity after the strong Q1 pace, that was confirmed today at 0.8%. The headline results regarding the business climate, for example, slipped to 110.4 from 111.2 and is the lowest of the year. To be sure, the readings are still relatively high, but the pace of growth is simply not going to be sustained.

The weakest of the major currencies today is the Swedish krona. It is off 0.8% against the dollar, bringing the week's decline to about 1.2%, second to the Australian dollar. The main culprit today was the disappointing manufacturing confidence. It dropped to 94.5 from 102.3 (which was revised from 102.7) and is the lowest reading since last September.

Due to the weakening of the economy and flirtations with deflation, there is rising speculation that the Riksbank may cut rates when it meets again in July. Before then Sweden will report Q1 GDP next week, and May CPI on June 12. The euro appears to have carved out a bottom around SEK8.97 and may test the SEK9.10 area next week.

S&P raised Spain to BBB from BBB- and stable outlook, which is a catch-up move in the sense that other major rating agencies had already recognized this improvement in Spain's creditworthiness. Fitch raised Greece to B from B-, ontheeve of local electoral results, which took some by surprise, though the primary budget surplus and the fiscal improvement is indeed noteworthy.

Moody's reviews are still to come. It may lift Slovenia to investment grade, but is unlikely to touch UK's rating. There is scope to change France's outlook to stable from negative, but is not a forgone conclusion. France remains a laggard in various reform aspects and both flash PMI measures fell back below 50. Poor growth prospects also hamper fiscal improvement.

The EU parliament and local election in Greece, UK and Belgium are a major talking point today. The EU parliament elections will not be known until Sunday. Exit polls hold some surprises. Of note the anti-EU Freedom Party (Wilders) in The Netherlands appears to have done much poorer than many expected, coming in fourth place with what appears to be about 1/8 of the voters support. If these results are borne out, it could lose a couple of seats (to 3) from the last election five years ago.

In the UK, the government's worst fears appear to have been realized in local elections. Early indications suggesting the Conservatives have lost more than 110 seatswhile the anti-EU UKIP picked up more than 90 seats. The UKIP did not only take some Tory strongholds, but it also appears to have succeeded against Labour in a number of councils. That said, Labour appears to have gained over 120 seats. The junior coalition partner, the Liberal-Democrats lost over 90 seats. There is some speculation that the poor Lib-Dem showing may lead to a leadership challenge to Deputy Prime Minister Clegg.

Belgium is also going to the polls this weekend for national elections. Recall that the last election, five years ago, took a record 541 days to forge a coalition government. However, perhaps it is Greece that electoral results are among the most important. It reform agenda may be at risk.

In the first round of local elections last week, the Golden Dawn, the far-right nationalist party increased its vote in Athens by three-fold over the last election in 2010 to about 16%. However, the greater threat comes from the anti-austerity Syriza Party, that has made it into the second round in four of the 13 regions and leads in Attica region (home to about half of the country's GDP) and is in a virtual tie in Athens. The main governing party, the New Democracy, was ahead in 8 of the 13 regions.

A weak showing in the run-off contests this weekend, could jeopardize its two seat majority and force earlier elections. Currently, the government need not call an election until 2016, but if forced, the sooner the election the worse it may be for asset prices. A snap election for later this year could have the largest impactwhile bringing the election into 2015 may not be so bad. The market appears to be taking it in stride, We note that despite the volatility last week, the 10-year Greek bond yield is up a single basis point today and is off 20 bp on the week. The Greek stock market is also advancing today. Its roughly 0.5% gain, brings this week's advance to over 6%.

The North American session today features new home sales in the US, consumer prices in Canada, and Mexico's Q1 GDP. New home sales are expected to rebound smartly (~10.7%) after the 14.5% decline in March. Earlier this week, investors learned existing home sales rose 1.3% in April after a 0.2% decline in March. Canada's headline CPI is likely to rise to 2%, which would be its highest in two years. However, the core rate is likely to remain tame. It is expected to tick up to 1.4% from 1.3%. The Bank of Canada remains decisively on hold. The market may respond more to a weak number (and push the Canadian dollar lower) than a stronger headline report.

Mexico's economy is expected to have accelerated to a 0.5% quarter-over-quarter pace from 0.2% in Q4 13. The year-over-year pace is expected to have picked to 2.1% from 0.7%. The peso is trading near its best levels for 2014, but has lost some momentum in recent days as the dollar has found a bid near MXN12.87.