Series of Poor News Lifts Dollar

The dollar is broadly higher to start the week.   The string of  developments has encouraged risk-off behavior.  Equity markets are lower.  Core bonds are higher.  The high beta currencies, suchas the freely traded emerging market currencies, the Australian and Canadian dollars, the euro, Swedish krona, and of course, the euro itself, are under strong pressure.  The US dollar and Japanese yen are the main beneficiaries.

The collapse of the Dutch government ostensibly over the implementation of austerity and the likelihood that the Socialist candidate Hollande wins the second round of the French election undermined the euro well before the disappointing flash PMI reports, which further undermined the euro and the risk appetite more generally.

Th flash euro zone PMI  for manufacturing and service fell to new five month lows of 46.0 an d 47.9 respectively from 47.7and 48.7.  Pushed lower by weakness in new orders, the German manufacturing sector is sputtering with a 46.3 reading.  The expansion of the underdeveloped service sector is ironnically preventing a sharper downturn in the overall economy.  The service PMI rose to 52.3 from 51.8.

The French manufacturing contraction continues.  The 47.3 reading is down from the 47.6 reading in March.  The service sector drag was more considerable.  It fell to 46.4 from 50.0.  Forward looking orders are still contracting.   Just last month, the Sarkozy government revised this year's GDP forecast to 0.7% from 0.5%.  Is it too cynical to suggestion electoral motivation?

To round out the negtive news stream from the euro zone, note that Italy's consumer confidence fell to 89, which appears to be a new historic low in this time series, from 96.3.

These developments follow the flash HSBC China manufacturing PMI.   Although it rose from 48.3 in March to 49.1, remaining below 50 warns that the world's second largest economy continues to slow.  Moreover, given its propensity to export, the softness in China's manufacturing sector is alos like a reflection of softer world demand, especially in Europe, its largests trading partner.

Australia reported an unexpected drop in producer prices, which underscore the expectation for a rate cut in early May.  The market had expected a 0.4% rise in producer prices in Q1, but instead they fell 0.3%, and the year-over-year rate fell to 1.4% from 2.9% in Q4 '11.  The dramatic and abrupt drop in price pressures may even spur some speculation of a 50 bp move.