Dollar Softer, Likely Temporary

Contrary to much speculation in the markets yesterday, France's sovereign credit worthiness has not been downgraded. Euro zone flash PMIs were slightly better than expected (though still below 50) and Spain raised much more money in its bond sales ( 6 bln euros vs 2.5-3.5 bln).  This helped spark a largely short-covering led euro bounce and has extended to the other major and emerging market currencies as well. 

There is scope for additional gains, but sellers will likely re-emerge in the $1.3050-70 area for the euro and $1.5550-$1.5600 in sterling.  The main drivers have not changed.

There was widespread expectations, though not shared here, that the Swiss National Bank would adjust the cap on the franc.  When this was not forthcoming today, and official comments give no hint that such a move is imminent, the franc has strengthened sharply.  Speculators in general appear to have been building a short franc position.  Partly this is  reflected in the recent CFTF data showing net non-commercial shorts in the futures market were the largest since July 2010. 

The Japanese Tankan survey was weaker than expected, with sentiment among the large manufacturers fall to -4.  The market had expected -2.  Capex plans were also disappointing; 1.4% next year, a little more than half of the consensus forecast.  The yen is strengthening today, participating is part of the move against the dollar.  Support is seen in the JPY77.60 area. 

China's flash HSBC PMI rose to 49 in December from 47.7 in November.   It did nothing for local stocks which shed another 2%+.  Te reading is below 50 for the second month, confirming the slowdown, of course, but also not undermining our sense of a soft landing.   

UK retails sales were a bit disappointing falling 0.4%, but after the out sized 1.0% increase in October, some payback seemed inevitable.  Of note the deflator fell to 3.6% from 4.4%.  UK inflation in general is set to fall considerably in the coming months.   

US has a full slate of data today.  The PPI and TIC data tends not to be big market movers.  Initial jobless claims may stead after some recent declines.  The 4 week average has spent the past month below 400k.  Besides the volatile weekly jobless claims, there is little insight into how the year is winding down.  Today the December Empire and Philly Fed surveys will begin filling in the picture.