Dollar Mixed, Market Digesting Developments

There are conflicting impulses for the capital markets today and this is contributing to the mixed dollar tone.   News from JP Morgan initially triggered risk-off tactics and the euro re-tested the $1.29 level, making new lows for the move.  It recovered later in the session, perhaps helped by some reports suggesting some potentially encouraging developments in Greek politics.   The Italian bill auction was well received, with better bid-coverage and essentially flat yields, which may help have helped stem the rot.  The market awaits the unveiling of Spain's new banking reforms. 

The euro briefly fell through the GBP0.8000 level, but subsequently bounced back sharply.   It is challenging yesterday's high near GBP0.8045.  A move above there, and especially a close above there, would be a positive technical sign (potential key reversal).  This is not uncommon price action.  After a barrier is triggered, stops run, it is not unusual to see prices snap back. 

The Australian dollar retested the week;s low near $1.0000 and also recouped the early steep declines.  Resistance is seen near $1.0060-80 now.  

China reported soft economic data and this will only encourage speculation of additional easing measures, perhaps even ahead of the upcoming G20 meeting.  The CPI was in line with expectations at 3.4%, down from 3.6% in March.  Producer prices are negative on a year-over-year basis for the second month. Industrial production slowed more than expected, with the year-over-year rate at 11.0% rather than tick up to 11.7% from 11.6% as the consensus expected.  Retail sales were also softer than March and softer than expected.  What is also encouraging for easing of monetary policy is also that new yuan loan slowed considerably.  The CNY681.8 bln of new loans in April was CNY100 bln less than the market expected and marks a dramatic slowing from the CNY1.01 trillion pace seen in March. 

The UK data warns that Q1 GDP may be revised lowed.  Construction spending in Q1 fell 4.8% and that could shave another 0.1% off GDP and deepen the contraction.  Separately, the UK reported input and output producer prices.  In put prices fell more than expected, reflected, as we noted about the US PPI reported due later today, the drop in commodity prices, especially energy.  On the other hand, output prices rose more than expected.  The 0.7% increase is almost double the consensus expectation. 

The EU Commission unveiled its new economic projections.  Germany and France GDP forecasts were tweaked up to 0.7% and 0.5% respectively.  Spain, Greece and Italy's growth were reduced to -1.8%, -4.7% and -1.4% respectively (from -1%, -4.4% and -1.3%).  Ireland and Portugal were unchanged at 0.5% and -3.3%. 

What follows from this is wider deficit/GDP forecasts. This is turn will set the stage for beginning invoke the clause that allows the deficit targets to be pushed out another year for countries that are making their reforms but experiencing serious economic shocks.  This is likely to be a key issue for the finance meeting next week. 

The largest state in Germany goes to the polls this weekend.  North Rhine-Westphalia is unlikely to result in a victory for Merkel's CDU.  However, it will be interesting to see how the smaller parties, including the Pirate Party does.  While a Grand Coalition is the odds on most likely scenario of the outcome of next year's national election, it is possible that some kind of center-left coalition, with the SPD-Green alliance at its core and maybe a smaller party can oust Merkel. 

The CDU have long lost their majority in the upper house of the German parliament.  This allows the SPD to be a bit obstructionist.  Today it managed to block Merkel's 6 bln euro income tax cut that would have been delivered in 2013 and 2014.