Yen and Australian Dollar Tumble, Other Majors Little Changed

Unexpectedly weak Chinese trade figures, reported over the weekend, weighed on the Australian dollar, while the yen shed recent gains after hitting a two month low against the US dollar before the weekend.  The familiar pattern in which the yen weakens, and the equity and bond market strengthen was once again in vogue.  The Nikkei gapped higher and tacked on nearly 5% and closed on the session highs.  Ten year yields slipped a little more than a basis point, though some other parts of the curve saw a little increase in yields.  

Japanese data was constructive.  Jan-March GDP was revised to 1.0% on a quarter-over-quarter basis from 0.9% and 4.1% annualized from 3.5%.  There were two main sources of the upward revision.  Domestic demand rose 0.6% rather than 0.5% and capex fell by half of what was initially estimated (-0.3% vs -0.7%).  

Separately, Japan reported an April current account surplus twice what the market expected at JPY750 bln.   The trade deficit was larger than expected at JPY818.8 bln, but this was more than offset by JPY2.12 trillion record high investment income surplus (JPY1.71 trillion in March).  It is through this channel rather than through exports that the weaker yen is boosting Japan's external balance.  

With the pre-weekend recovery from the brief dip below JPY95 through the gains in Asia/Europe, the dollar has recouped nearly 40% of the down move since May 23.  The next retracement objective is seen near JPY99.25 and then JPY100.30. 

For its part, the Australian dollar opened lower after the China posted an unexpected decline in imports and general a slate of data that suggests the world's second largest economy is consolidating its downshift.  The Aussie fell nearly a cent from the pre-weekend close before finding a solid bid just below $0.9400.  Although it has stabilized, it remains fragile.  Initial resistance is seen near $0.9460.  Expectations for an August rate cut, ahead of the September election, are rising.  

Beyond the yen and Australian dollar, the weakest of the majors, comes Sweden, with disappointing industrial production figures (-0.5% instead of consensus +0.3%).  Note that after a sub-50 manufacturing PMI in April, it bounced back to 51.9 in May.  This follows on the heels of the weaker than expected service PMI last week, which posted its third consecutive reading below the 50-boom/bust level.  The euro rose to test the year's high set in late-Jan (~SEK8.72).  We suspect a near-term high for the euro may be in place.  Support is seen near SEK8.65.  

The other major currencies are trading more quietly, waiting for stronger technical or fundamental signals.  Of note French industrial production, like Germany's before the weekend, surprised on the upside.  French output rose 2.2%, well above the consensus for a 0.3% increase and is significantly better than the PMI survey.  

Recall that last week Germany reported a 2.3% decline in factory orders, encouraging economists to warn of a drop in industrial output.  Industrial production was reported before the weekend, jumping 1.8%.    Italy, however, could not follow suit.  Earlier today it reported a 0.3% contraction rather than flat as the market expected.  

The euro has been confined to a relatively narrow range of $1.3178-$1.3230.  It is trading just off the highs near midday in London.  The $1.3245 area looks likely to cap upticks, in lieu of fresh impetus.  Sterling is holding in a bit better as, unlike the euro, it held the pre-weekend lows.  The $1.5560 area may also contain upticks today.  

The S&P 500 gapped higher on Friday, and as we noted, this may prove to be a break away gap that is not only unfilled in the near-term, but signals a resumption of the advance that will likely take this much watched index to new highs.   It is poised to gap higher today, but this gap, unlike the one from Friday, is likely to be a normal gap, which means it will likely be filled.