FX: Fire but No Light

The US dollar is little changed in thin month end activity in Europe, ahead of tomorrow's May Day holiday and the ECB meeting on Thursday. The broader capital markets are firm. The MSCI Asia Pacific Index rose nearly 1% to finish April at its best level in nearly 5-years. The Nikkei slipped by almost 0.2%, while the Topix gained 0.3% to finish April with an impressive 11.8% and 12.6% gain respectively. As we have noted, the smaller (and more flexible) companies represented in the JASDAQ, advanced by 18.2% this month to bring the year-to-date gain to a mind-boggling 67.4%. 

European bourses are mostly higher, with the Dow Jones Stoxx 600 up about 0.25% near midday in London, led by financials and oil and gas. Bond markets are firmer and with the Greek parliament passing key legislation over the weekend, the next tranche of aid will forthcoming and this helping the Greek bonds extend this month's rally, which has seen the 10-year yields fall 130 bp. Italy's 10-year yield has fallen 87 bp this month, while Spain's yield has dropped 95 bp.

While there has been much in the way of economic data, it has not inspired new moves in the foreign exchange market. The euro briefly extended yesterday's gains, but ran out of steam ahead of the $1.3130-40 cap. Sterling marginally slipped through yesterday's lows, but largely straddled the $1.55 level. Although Japanese markets were open after yesterday's celebration, the dollar has been confined to Monday's range. The 20-day moving average, which largely caught the mid-month swoon and the pre-weekend low, now appears to be serving as resistance. It comes in near JPY98.20 now.  On the downside, a break of JPY97.20 area would sour the technical tone and warn of a scope for another yen decline.  The dollar bloc remains firm. 

There was a slew of economy data reported today.  The Japanese data was mixed, though generally constructive.  The PMI rose to 51.1 from 50.4, matching its best level since Aug 2011.  However, industrial production in March rose only half of what was expected at 0.2% and the April forecasts were cut to 0.8% from 1.0%.  Unemployment unexpectedly fell to 4.1% from 4.3%.  Overall household spending to 5.2% year-over-year after a 0.8% rise in Feb and well above the Bloomberg consensus of 1.6%. Yet, retail sales fell a sharp 1.4%, offsetting the bulk of Feb's revised 1.7% increase.  

The take away is that with Europe contracting and the US slowing, Japan's economy appears to be gradually on the mend before the BOJ's massive monetary easing was implemented.  

In fact, in a bit of a reversal, the downside economic surprises are coming from Germany now rather than France.  This was true with the flash PMIs seen last week and with the consumption figures released today.  German retail sales fell 0.3% in March, largely as expected, but the surprise was that the Feb series was revised to -0.6% from +0.4%.  The March decline was the 4th decline in the past five months.  In contrast, French consumer spending jumped 1.3%, the largest rise in Feb 2012 and offset the 0.9% decline in Jan and 0.2% decline in Feb. 

The UK data was mixed, but overshadowed by tomorrow's Nationwide house price index and the CIPS manufacturing survey.  Consumer credit rose for the fourth month, though mortgage lending slipped and the weakness in M4 (-0.9%) does not bode well for retail sales. 

Lastly, we note that South Korea's industrial production plummeted 2.6% in March, roughly three times larger of a decline than the market had expected.  This follows a revised -0.9% decline in Feb (from -0.8%).  This plays on fears of the consequences of a weak yen.  Yesterday the director general of the central bank warned that the impact of the weak yen will have greater impact here in Q2 than in Q1 (which saw the South Korean economy expand by 0.9%).  The government appears to be trying to preempt some of the negative impact with fiscal stimulus announced earlier this month.    Additional measures to encourage investment and support for small exporters are expected in early May.