Dollar Stabilizes, Europe News Stream Poor

The US dollar is little changed is little changed against most of the major foreign currencies, European equities have higher, gold and oil prices are firmer.  It is as if investors are taking a breath after recent aggressive activity.   The dollar initially extended its gains before the momentum faded in the European morning. 

It was not the news stream, which was poor to say the least.  The flash European PMI and German IFO warns that even the German economy may be fizzling.  UK Q1 GDP was revised down.  Yet by the news hit the euro selling appears to exhaust itself in near $1.2520.  The $1.2600 area remains the proximate ceiling and needs to be overtaken to stabilize the technical tone. 

Here is a quick summary of the data: 

·        Euro area mfg PMI 45.0 in May vs 46.0 in April

·        Euro area non-mfg PMI46.5 vs 47.9

·        German mfg PMI 45 vs 46.3

·        German non-mfg PMI 52.5 vs 52.6

·        French mfg PMI 44.4 vs 46.9

·        French non-mfg 45.2 vs 45.2

·        German May IFO 106.9 vs 109.9

·        UK  Q1 GDP -0.3% vs -0.1% initial estimate

The euro zone PMI that the service sector seems to be stabilizing at lower levels, but the manufacturing continues to fall.  The German IFO appears to be finally converging with the PMI.  The engine in Europe may be beginning to sputter and this ironically may not only be saying something about Europe, but China as well, which is replacing France as Germany’s largest trading partner. 

The UK GDP is worth looking at more closely.  Consumption was weak, but there were two pockets of strength to note within the otherwise poor report.  First, business investment is strong, rising 3.6% quarter-over-quarter.  The market had expected a decline.  It is up 14.2% year-over-year.  This is remarkable and may be related to the Olympics.  In any case, it does not seem sustainable. 

The second pocket of strength is even less expected.  Government spending under the austerity regime rose 0.6%.  The market was expected a flat reading.  It is the largest rise in Q1 08.  This is the mirror image of what we have noted about the US.  Even without a formal coherent fiscal strategy, the government sector has been a drag on US GDP.   

Lost in the Grexit focus, yesterday the euro zone reported its current account and portfolio capital flow figures for March.   The 10 bln euro inflow in February was reversed into a 35 bln net euro outflow.  Deconstructing the net flows reveals that foreign investors bought 2 bln of euro zone debt and 22 bln euros of equities.  European investors exported 60 bln euros, mostly in buying foreign bonds  and money markets.  Meanwhile, concerns that deposits in euro zone banks, especially including Spain and Italy are fleeing has spurred some talk of EU-wide deposit insurance, though it seemed that joint bonds received more discussion at yesterday's informal EU summit. 

This is providing a challenge for the Swiss National Bank.  It cost of maintaining the euro=Swiss floor at CHF1.20 is apparently becoming more expensive.  Market talk suggest significant euro purchases have been made in recent days by the SNB.  Recall though the SNB diversifies its reserves away from the euro. 

In March, the most recent breakdown of reserves shows 51% are kept in euros, with the dollar receiving 28%, sterling 5%, the yen 9% and the Canadian dollar 4%.  Although the SNB is known for its financial prudence, 3% of its reserves were in "other" currencies, which for the SNB includes not just the Australian dollar and Danish krone, but also the Singapore dollar and Korean won.