Consolidative Tone, Except for Sterling and Yen

The US dollar is largely in a consolidative mode ahead of the US jobs data, service ISM and more developments from Greece, where as noted previously in this space, European officials drove the situation to the edge of the abyss and now are pulling back.

The euro zone service PMI came in a t 56.0, which represents an improvement over the 55.4 flash but still softer than April and is the slowest since Jananury.  Nevertheless, Trichet is still likely to use word cues next week that will boost the market's confidence of a rate hike next month, though of course he does not pre-commit.  

The UK service sector PMI was weaker than expected at 53.8, down from 54.3 in April.  Stelring was pushed to new lows for the week, a bit below $1.6300 and is the first day in which sterling is trading below its 20 day moving average since May 26th. 

In the US, the ADP data encouraged the market to lower its expectations for todya's US jobs report.  Yet the market still seems to be vulnerable to poor data.  A strong report, for example, would likely be shrugged off because of the broader economic readings and the downward revisions to GDP that are taking place and concern about the progress toward a fiscal resolution, for which Moody's gave it a few weeks.  

If this understanding is correct, then the euro can run up toward $1.4550-70 and sterling too can recovery toward $1.6350-70.  However, ahead of the weekend, stronger gains, after a big week for the euro, seems more difficult to envision.  There is also speculation that China may hike rates over the weekend, though this is becoming a semi-regular pre-weekend chatter. 

The dollar edged to a new 3-week low against the yen.  There did not seem to be a key catalyst, though pressure on the crosses was apparent. 

Whiel there is much to discuss about Greece, suffice it is here to simply note that there are three components of a Greek package:  new loans from EU/IMF/EFSF (or some combination thereof), privatization and voluntary roll-over.  The last is the new development and many are particularly skeptical of it and are talking financial repression.   Initial guesses are that some 55% of the 2012-2014 maturing bonds will be rolled over and this may be worth around 7 bln euros this year and 15 bln euros next year and in 2013. 

Remember banks hold such investments in one of two accounts--hold to maturity and trading account.  The bonds in the former bucket are more likely to be rolled over. 

Lastly, like many I have argued that a reduction of the debt burden is ultimately necessary in Greece and Ireland, and probably Portugal.  However, my reading of the economic and political entrails suggests the European elite has the will and wherewithal to kick the can down the road.   As Keyenes observed, the markets are like a beauty contest and the trick is not to pick who you think is the most beautiful but who every one else thinks is the most beautiful.   That is to say the goal of this exercise is not to dream up what could be the case or what should be the case, but what is likely to be the case.