Dollar Eases, Australia Surprises, ECB Awaited

The US dollar is broadly lower amid less dismal developments and the collective sigh of relief has not only lifted the major foreign currencies, but also equity markets, commodities and peripheral European bond markets.  Some of the momentum has eased as the market now turns its attention to the ECB.  

If the odds of an ECB rate cut were being under-estimated by the market, as I have argued, today's German industrial production data makes an even more compelling case.  April industrial output fell 2.2% offsetting in full the revised gain in March (initially 2.8% now 2.2%) and more just as importantly pushes the year-over-year rate into negative territory (-0.7%) for the first time since Dec 2009.

   

Here are some details:  Construction output fell 6%.  In Marched it had surged 26%.  Production of investment goods dropped 3.6%.  Energy output fell 2.8%.  The figures may have been dragged down by 1) the correction to the March rise and the public holiday on May Day (inducing many to take off April 30).  

These would have been fine explanations if  a) manufacturing PMI had not been falling.  The May report out last week was the third consecutive reading below the 50 boom/bust line and b) yesterday's factor orders data did not show that foreign (outside of EMU) orders fell 4.7% in April.  

Australia gave the biggest surprise so far today.  Growth in Q1 was twice what economists had forecast and Q4 growth was revised up to boot.  The Australian economy expanded 1.3% in Q1 on a quarter-over-quarter basis.  This is twice what the Bloomberg consensus expected.  Growth in Q4 11 was revised to 0.6% from 0.4%.   

This has lifted the Australian dollar and raised some doubts about the likelihood of a July rate cut, as expected after yesterday's 25 bp move by the RBA.   The Australian dollar has not finished the NY session above its 20-day moving average since April 30.  It may do so today.  It comes in near $0.9840 today,.   Immediate resistance is seen near $0.9900.  

The New Zealand dollar has been lifted by its Aussie cousin, but also by the results of Fonterra's milk powder auction.  Prices for Aug delivery rose 12.3% from the May 15 sale and is the first gain since Dec.  Milk prices bounced off 2 1/2 year lows seen a couple of weeks ago. 

The UK returned from its holiday and reported construction PMI.  It came in at 54.4, which is near the Bloomberg consensus of 54.2, but down from 55.8.  If the BOE is leaning toward renewing its asset purchases or even cutting rates, today's data does not stand in the way. 

The glass is half full today as the market focuses on the possibility of some compromise in terms of Spanish banks.  A potential EC proposal being discussed is to allow Spain's FROB (the bank recapitalization fund) to borrow from the EFSF/ESM.  Germany still seems opposed and wants the sovereign to borrow the banks, as the treaty requires.   No short cuts.  

Spain has three important challenges:  the banks, the regions and the economy.  Today Spain reported that industrial output continues to collapse.  On a work day adjusted basis, industrial output is off 8.3%  in April from a year ago.  A 6.5% fall had been forecast after a 7.5% decline in March.  The April fall is the largest year-over-year decline since Oct 2009.  

Spain will try to sell bonds tomorrow, a few days after an official warned that Spain has been effectively shut out of the market.   The benchmark 10-year yield is off 40 bp since the middle of last week.  The IBEX is up 6% in the same time, half of which is being scored today.