Consolidative Tone Offers Fragile Support to Dollar

The recent pattern is holding.  Fridays tend to be trend days.  There is often some albeit limited follow through on Mondays before consolidation phase sets it.  The foreign exchange market is in that consoldiative phase that began yesterday. 

The euro found support near $1.4460 and looks to probe higher in North America today.  Still the uncertainties surrounding Greece 2.0, softer service sector PMI reading may prevent the euro from moving convincingly above the down tend line on the daily and weekly charts, drawn off the early May and early June highs (coming in now near $1.4520).   Still, talk of Asian reserve manager demand and anticipation of an ECB hike on Thursday may limit the downside. 

Germany's Constitutional Court hears the case against the Greece 1.0, but a ruling is not expected for several weeks at least.  More immediately, the market is trying to digest the implications of S&P warning yesterday and Moody's more delphic message today.  And then there is ISDA and some indication that the French plan would not likely constitute a credit event (trigger CDS).  

The UK offered a pleasant surprise with a CIPS service sector PMI that ticked up to 53.9 from 53.8 in May.  After poor manufacturing and construction PMI, a decline to 53.5 was expected.    Sterling recovered a bit more than a cent in response, but ran out of steam in front of yesterday's high near $1.6140.  Look for it to slip back toward $1.6040-60, perhaps led by sales against on the euro on the cross. 

Australia's central bank left rates on hold as widely expected.  The subsequent statement was a bit more cautionary, warning growth may not be as strong as previously anticipated and impact of strong Australian dollar.  Earlier it had reported a larger than expected trade surplus--the one bright spot of the economy-helped by high coal and iron ore prices--while the service sector slowed to 48.5.    The Australian dollar slipped to 4-day lows, with support near $1.0650 holding. 

There are heightened concerns about China today.  First, Moody's warns that local governments may $540 bln in debt, considerable more than had been acknowledged.   Banks and local governments are the channels through which Beijing implements its fiscal policy.  Loans to local governments through their special purpose vehicles pose risks for Chinese banks (see recent post China:  Strong but Fragile).  Second, there is heightened speculation of a rate hike as early as this weekend. 

Sweden's Riksbank hiked rates as expected by 25 bp.  Since it announced it has completed unwinding the long SEK position it established during the crisis, the currency has strengthened2.3% against the euro.  It has retraced 50% of the euro's rally from the end of May dip below SEK8.9 to the late June high just above SEK9.27.   Initial resistance is now seen near SEK9.09.   The Riksbank is one of the few major central banks that is likely to tighten more than the ECB this year. 

Lastly, the dollar is trading on the firm side against the yen, but well within the recent range.  Resistance is marked by last week's high near JPY81.30.   Initial support is seen in the JPY80.30-50 area.