Dollar Mostly Soft, Euro Softer

The euro is a dog.  Instead of deriving support from the easing of tensions in Ukraine/Crimea and the best service PMI since June 2011, a surge in January retail sales (1.6%, reversing the revised 1.3% decline in December, the euro has been sold to new lows for the week and nearing the low seen before last week's February inflation report (~$1.3695). 

With the recent string of data, most observers recognize that a dramatic move by the ECB tomorrow, such as QE or a negative deposit rate, is unlikely.  The focus now is on two possible actions:  A small repo rate cut and/or formally decision to cease sterilizing the SMP bond purchases.  

We regard the former as token and symbolic.  On the latter, we may have been wrong about, not appreciating that the Bundesbank had apparently softened their opposition.  A note later today will outline our views and market implications.  

The service PMI rose to 52.6 from 51.7.  The flash readings for Germany and France improved in the final reading.  Of note, Italy's showing was most impressive rising to 52.9 from 49.4 in January and expectations for 49.8.  It was the first move rise above 50 in four month.  New business was particularly strong, at multi-year highs.  This helps blunt the softer manufacturing PMI earlier this week.  

Spain, on the other hand, disappointed with a 53.7 reading compared with 54.9 in January and expectations for a small gain.  The composite PMI rose to 53.3 from 52.9. Employment gained and output prices ticked up to 49.3 from 49.2.      The gradual recovery in the euro area is intact.  

The UK service PMI slipped to 58.2 from  58.3.  The market was prepared for a larger pullback. The employment reading rose to new record highs.  The Markit compilers opined that the data is consistent with UK growth of 0.7% here in Q1.  Separately, the BRC reported a 1.4% drop in prices in February after a 1.0% year-over-year drop in January.  It is the largest drop since the BRC time series began in 2006.  

Sterling has recorded lower highs this week and lower lows.  To maintain this streak it needs to slip below $1.6640 and that would also require breaking below the uptrend line drawn of the Feb 24 low (~$1.6585).   In larger picture, after rallying strongly in the first half of February, from near $1.6250 to about $1.6825, sterling has been chopping out a consolidative range and that consolidation continues. 

If the euro has not responded well to good news, then Sweden has not responded poorly to weak economic news.   Industrial production was expected to have risen by 0.5% in January, but instead fell 0.3%.  Orders data plummeted by 13.9% instead of the 8.9% drop economists expected.

There were some mitigating factors.  First, the February PMI services rose to 56.8 from 55.,9.  Second, the revisions in December industrial production to -0.3% from -1.0% the level of output is better than expected.  Third, industrial orders are a volatile series and the 15.4% rise in December was revised to 18.5%.   

The krona is holding its own.   The euro has slipped toward SEK8.8450, just ahead of the shelf built over the last three sessions.  A break would target SEK8.80.  We note that the 5-day average is set to cross below the 20-day average, indicating a change in the short-term trend.  

Australia reported Q4 13 GDP of 0.8%, just above expectations and Q3 growth of 0.6%.  Of note, net exports added 0.6 percentage points to growth, while investment cut 0.5 percentage points.  This coupled with news that HSBC China Service PMI rose to 51.0 from 50.7 and that at the start of the National People's Congress (parliament) Premier Li Keqiang announced a 7.5% growth target this year, may have encouraged some Aussie buying.  It traded at a new high for the week, but offers in front of $0.9000 proved too much.  

The North American session features the Bank of Canada meeting.  Rates are widely expected to remain unchanged at 1.0%.  The central bank has most recently been emphasizing the risks of too low inflation.  A dovish stance continues to be expected.    The US dollar is in the upper half of its recent CAD1.09-CAD1.12 range.  Within in it, support is seen in the CAD1.1020-50 area and resistance CAD1.1130.   We are more inclined to buy US dollar on pullbacks.  

The US economic calendar is three potentially market moving items:  The ADP employment estimate, the service ISM and then later the Fed's Beige Book.  The consensus is for a lackluster 155k increase in ADP figures.  In recent months, the ADP estimate has often been above the initial BLS private sector estimate.  Nearly regardless of the report (of Friday's official figures), there is little doubt that the Fed will announce another $10 bln of tapering at the FOMC meeting in a couple weeks. 

The service ISM is expected to ease to 53.5 from 54.0.  Recall the index peaked last August just shy of 58.  It finished last year at 53.0.  We are paying just as much attention to how the data is reported relative to expectations than just the absolute data as a weak Q1 is already baked in the cake.  Expectations have been adjusted and the data is more mixed to better than expected than was the case in January and February.    The Beige Book will be most important from this perspective too:  how much have transitory factors weighed on GDP, including, but not exclusively the weather.