Before We get the ECB...

Tomorrow's ECB meeting remains the focus of attention, but ahead of it, the diary is packed. The main highlights of the session, thus far, include strong Q1 Australian GDP, the thirds consecutive drop in New Zealand commodity exports, softer euro area services PMI, somewhat better than expected UK CIPS services PMI and stronger Swedish data (PMI and industrial output).

Still to come today is the ADP private sector job estimate, trade balance, and the services ISM and the Beige Book. In addition, the Bank of Canada concludes its meeting and will issue a statement. There is also a G7 meeting which poses some headline risk.

The Australian dollar spiked to almost $0.9300 on news that economy expanded by 1.1% in Q1 rather than the 0.9% the consensus expected. It is the fastest pace in two years. Net exports were the main driver, accounting for 1.4 percentage points, with all the other components of GDP amounting to a small drag. First quarter is historical, and the more recent data suggests the economy has slowed here in Q2.

Meanwhile, the eighth consecutive decline in the milk auctions sheds light on the third consecutive decline in New Zealand commodity exports to their lowest level in three months. This has weighed on the New Zealand dollar, which is the poorest performing major currency over the past five sessions, losing 1% against the greenback. Today is the first time in more than a year that the Australian dollar is trading above its 200-day moving average against the New Zealand dollar. It has not spent much time above that threshold in nearly two years.

The euro is has been confined to a 30 tick range in Asia and the European morning. It has drifted gently lower, and the softer service PMI data did not elicit much of a reaction. The 53.2 reading was down from the 53.5 flash report. Both Germany and France's flash estimates were shaved lower. Italy was a bit stronger than expected, while Spain was a bit softer than expected. The composite reading (manufacturing and services) stands at 53.5 down from 53.9. It suggests the euro zone is not accelerating, but a mild economic recovery remains intact. As German officials have signaled, the region's locomotive is also experiencing somewhat slower growth in Q2.

For today, ahead of the tomorrow's ECB meeting only a move out of the $1.3580-$1.3650 range is important. Reserve managers have reportedly been featured buyers of euros below $1.3600, and it would not be surprising if the bids were pulled due to the event risk. We suspect an asymmetrical risk that the euro breaks the range to the downside first, and this would be consistent without warning that the market may be prone to buy the euro after the ECB event has passed.

Sterling tested important support at $1.6700. It was worth almost half a cent bounce. Initial resistance is seen in the $1.6750-60 area. The BOE meets tomorrow, but no statement is issued when it does not do anything, so it is a non-event. On the other hand, news today that a large UK bank moved to cap mortgage loans in excess of GBP500k at four times the borrower's salary is seen as preempting potential official action (macroprudential) that may be forthcoming.

Separately, it was the third PMI of the week for the UK. Manufacturing was in line with expectations (57.0); construction was weaker than expected (60 vs. 61) and today's service PMI was a bit better than expected at 59.0 (vs. 58.7). The composite reading is at a lofty 59.0 (down form 59.2). The take away is that the UK economy is continuing to expand a robust clip here in Q2, and it is now that the UK will (finally) join the US and Germany in having surpassed the pre-crisis economic peak.

The Swedish krona is the strongest of the majors today, with a 0.25% gain against the dollar (only the Australian dollar and the Norwegian krone are firmer against the greenback near midday in London). The krona was bolstered by strong economic data. The services PMI ticked up to 58.5 from 57.9 (initially 57.8). The consensus called for a decline to 56.6. Sweden also reported a 3% rise in May industrial output, which lifted the year-over-year rate to 0.6% from -4.4%. The market had expected a 2% gain on the month and a -1.2% year-over-year rate.

The strength of the data gives investors cause to re-evaluate the probability of a Riksbank rate cut next month. At the end of last week, the euro had approached SEK9.15, the upper end of the recent range and the strongest since mid-2012. The risk is for the euro to slip to the lower end of its range nearer SEK8.97. Initial support is seen near SEK9.03.

Helped back the rise in US yields, the dollar extended its gains against the yen. The JPY102.80 high seen in Asia is the best since May 5. US yields are a bit softer today, and the dollar has lost its earlier momentum. Initial support is seen near JPY102.40.

The Bank of Canada is universally expected to keep policy on hold. Its statement is likely to reiterate its neutral stance. As we have learned, there are fifty shades of gray and the risk seems slightly biased to a softer neutral stance. The Canadian dollar has weakened ahead of the meeting and could be bought back after the event. However, unless the US dollar is pushed back below CAD1.0880, the technical indicators may still favor the US dollar.

US and Canada April trade figures will be released today, but it is the US ADP data, released 15 minutes before the trade reports, that will be more important. The ADP report steals some of the thunder from the official jobs release, which we argue has been somewhat downgraded due to the changing threshold at the Federal Reserve. The consensus looks for about 210k increase in the ADP estimate. The service sector ISM/PMI data will also be reported. It is expected to be consistent with a strong economic recovery after the contraction in Q1. Finally late in the session, the Fed will release the Beige Book. It tends not to be a market mover, but investors will likely focus on two aspects: wage growth reports (constrained or minimal) and prices more generally, and the housing market, which Yellen had identified as the risks to general constructive economic assessment.

There may be some headlines coming from the G7 meeting. Today's discussion is thought to focus on the geopolitical issues, especially Ukraine, and perhaps the South China Sea. Tomorrow officials are expected to discuss the economy. The sidebar discussions may be more interesting in some respects. France has protested the planned US fine to a large French bank for money laundering violations. Within Europe, there is still much positioning in the wake of the EU parliament election and negotiations between the UK and Germany may be put to the test if the some Conservatives continue to press for a pact with German's Alternative Party, which is a domestic rival of Merkel's CDU, which is already in a pact with the UK Conservatives.