Currencies Continue To Consolidate

The holiday abbreviated US equity and bond session today will likely ensure that the major currencies continue to trade in narrow ranges.  With the BOE/ECB meeting outcomes Thursday and the US employment data Friday, the price action could very well resemble a coiling spring, with a big move to follow this consolidative phase.  

There have been a few developments that shape the larger macro picture, but do not really provide new trading incentives.  In addition to the macro-economic developments, the tensions with Iran are rising, with its threats to close the Strait of Hormuz.  Brent crude is rising, as is the premium over WTI.  Note that many commodities have quietly rallied.  Gold is up almost 4% in the past three sessions.  Copper is up 1.4%, at a couple week highs.  Corn prices are at 10-month highs and soy is trading near 4-year highs.  

In Asia, there were three developments to note.  First, China's official services PMI rose to 56.7 in June from 55.2 in May.  This helped blunt the negativity for continuing to decline manufacturing PMI released over past weekend.  This fits nicely into the "economy transitioning" from export to domestic growth narrative, but that is a multi-year process, not something that one would expect to see as a break in high frequency data.  

Second, the Reserve Bank of Australia kept rates steady as widely expected.  The key question going into the meeting was whether the 75 bp in cuts in the May-June period would be continued.  The RBA appeared to upgrade its assessment of its domestic economy, while expressing concern (and who wouldn't) over the international economy.  As an aside, Australia reported a 27.3% jump in May building approvals, which is more than 5-times larger than the consensus expected.  The April series was revised to show a smaller decline (-7.6% rather than -8,7%).  On balance, there seemed to be no signal that the RBA will cut rates in August.   It will be, "economic data dependent", but the key data may be international.  

Third, total wage earnings in Japan fell 0.8% year-over-year in May, the first decline in four months.  The decline was driven by the 40% plunge in special payments (summer bonuses).  Base wages rose 0.4% year-over-year, which is the first increase in a couple of months.  Overtime pay was up for the 8th consecutive month and has risen 6.4% year-over-year.  Do not be misled by the headlines, this data is constructive.  Consumption appears more a function of base wages than total wage earnings and the increase of over time pay speaks to stronger corporate activity and holds out the promise of job creation.  

There were also three developments in Europe to be aware of.  First, and the most interesting is the decision by Ireland to put its toe back into the capital markets for the first time since receiving aid two years ago.  Ireland will offer a debt exchange on Thursday.  Even before the summit, Ireland was considering testing the waters and this was expected to be seen in July.  The summit seems to have boosted Irish officials confidence to do what they wanted to in the first place.  

Second, the UK reported a much weaker than expected construction PMI.  It fell to 48.2 in June from 54.4 in May.  This is the lowest reading since Dec '09 and the forward looking new orders component is now at its lowest level since April 2009.  The consensus expected a 53 reading.   Mortgage lending, approvals and M4 were also weak.  Prior to the data there was wide spread expectation for the BOE to announce a resumption of gilt purchases at the conclusion of the MPC's two day meeting on Thursday.  

The third development to note Spain's unemployment queues shrank for the second month.  The almost 99k decline in June followed the 30k decline in May.  However, before getting too excited, recall that the manufacturing PMI fell to 41.1 in June from 42 in May.  The economy is contracting and the government has warned that the pace of contraction may have accelerated in Q2 from Q1.  The decline in unemployment is likely to prove to be seasonal in nature rather than marking a turn in the economy.  

Looking forward to the remainder of today and into tomorrow, Italy and France will be moving into the spotlight.  Monti is due to speak to the Italian parliament to discuss the summit, but market participants are more interested in his fiscal consolidation plans.  Due to lower tax receipts, the costs of the earthquake, unexpected bank support (MPS) and extra labor costs associated with increasing the retirement age, Monti may have to come up with additional measures.  There is some speculation his measures may focus on health care, but there may also be an increase in electricity and transport taxes.  

Ahead of the Prime Minister presentation later, the French Finance Minister is preparing the ground by noting that additional measures will be needed to France to reach its 4.5% budget deficit target.  More measures will be needed next year to reach the 3% target.  The failure of France to meet its deficit targets would undermine its ability to negotiate with Germany and articulate a less austere alternative.