Market Lacks Conviction

The US dollar is mostly firmer today, but the market lacks near-term conviction.   After last Friday's unscheduled mini-EU summit, it seemed like key officials recognized that something more needs to be done for and with Greece, shy of asking it to leave the monetary union and shy of a default, but today it is far less clear that the political elite in Europe are united.  Moreover, the secretive nature and limited attendance of last Friday's meeting is an additional annoyance/frustration.  

 Exactly what needs to be done and under what terms is open to debate, it appears.   The flare up of the euro zone debt crisis is helping to mitigate what has been the main driver of the dollar, namely the divergent monetary paths.   Greece 6-month bill auction showed a minor 8 bp yield increase from April.  The bid to cover was a bit lower and the foreign take down was somewhat smaller,but on the whole was not a disruptive force today. 

The return of the Japanese from the Golden Week holidays has brought back yen sellers.  Foreign investors have bought nearly $40 bln of Japanese equities this year and that is a multiple of the foreign flows that have gone into India, Indonesia, Philippines, Korea, Taiwan and Thailand.    The dollar has held below JPY81 for past four sessions, but support near JPY80 has held since holiday ended.    I think the dollar can have another run at the upside resistance today.

The 5 and 20 day moving averages I find helpful in identifying the near-term trend.  I note that the they crossed to the downside on sterling yesterday and the euro today.    They are crossing the dollar index too (which as you know is largely the euro or currencies that look like the euro, ie  Swiss franc, sterling, Swedish krona with only 22.7% for the yen and Canadian dollar (non-Europe component) and no role for our China and Mexico, two other large and important trade partners).  

I am not convinced that this breakdown in the moving averages is a signal to sell the currencies, though I am sympathetic to that idea.   I am concerned that the "pretend and extend" strategy in Europe is not going to be abandoned, but rather pushed further.  Once tensions ease the fact the Federal Reserve is still easing for the next six weeks and will maintain the size of its balance sheet for several more months, while the ECB hikes in July, the dollar appears vulnerable through the interest rate channel (watch 2-year yield spread).   

Higher than expected Norwegian inflation underscores the likelihood that the Norges Bank hikes rates tomorrow by 25 bp.  However, the bulk of the rise in inflation seems to be traced to the rise of air fares that has been skewed by Easter.  That means inflation is likely to ease in the period ahead and this will mean after this week's rate hike, no more in Norway until Q4 at the earliest.   Sweden comes through with relatively strong orders and production figures.  Riksbank tightening will likely outstrip Norway's. 

French industrial production showed an unexpected contraction and this is somewhat worrisome in light of the PMI reports.  Sentiment running ahead of actual.  Swiss inflation was on the low side and this has seen the Swiss franc play a bit of catch-up with the euro.  The 5 and 20 day moving averages in the dollar-Swiss franc have not crossed...yet.