Dollar is Bid to Start New Week and Month

The US dollar is firmer against the major and most emerging market currencies. Poor data from Australia, in the form of an unexpected drop in building approvals, and disappointing European manufacturing PMI readings and softer German states' inflation took a toll ahead of this week's events. 

Steady US Treasury yields and the rally in the Nikkei (+2%) helped lift the dollar above JPY102, but last week’s high near JPY102.15 remains intact. The euro looks poised to test last week’s low near $1.3585. Sterling is faring better, but a test on the pre-weekend low near $1.6715 and a return to last week’s lows, just below $1.6700 is the risk. 

The Australian dollar returned to the middle of its $0.9210-$0.9330 the range seen in the second half of last week. While the manufacturing index rose to 49.2 from 44.8, the fact that it is still in contraction mode (below 50) failed to provide new fodder for the bulls and new that building approval fell 5.6% in April (consensus was +2.0%), and the March series was revised down to show a 4.8% decline rather than 3.5% gave the bears what they were looking for. Key support remains near $0.9200. The central bank meets first thing on Tuesday in Sydney. No one expects a rate cut, but with this economic backdrop, a somewhat more dovish tone is likely.

Europe's manufacturing PMIs were almost universally disappointing. The euro area reading came in at 52.2, down from the flash 52.5 estimate. Germany itself was revised to 52.3 from 52.9. Italy slipped to 53.2 from 54.0. The consensus was for 53.7. Spain stood out. Its manufacturing PMI rose to 52.9 from 52.7, in line with expectations. France's flash reading of 49.3 was revised to 49.6. It remained below the 50 boom/bust level and were down from 51.2 in April. It is surely nothing to write home about.

Outside the euro zone, the PMI data was not much better. The 57.0 reading from the UK was in line with expectations, down slightly from the 57.3 in April, which is still a fairly strong reading. Switzerland's PMI fell to 52.5 from 55.8. The consensus was for 55.5. Sweden's manufacturing PMI fell to 54.1 from 55.5, for a bigger drop than the market expected. Among the largest disappointments was with Norway's 49.8 reading. The consensus expected no change from April's 51.2.

Meanwhile, following on the heels of the soft flash Italian and Spanish CPI figures at the end of last week, German states reported soft figures today. The risk is for the national figure, to be released shortly will undershoot the consensus for a 1.1% year-over-year increase. A sub-1% rise will underscore the likely weakness when the flash May CPI is released tomorrow. The risk is for something close to 0.5% from 0.7%.

This is turn underscores the anticipation of ECB action later this week. Signs continue to point to a 10-15 bp cut in key rates, including the deposit rate. A conditional lending scheme to help facilitate financing for small and medium businesses is anticipated with the signals suggest a 4-year, 4 bln euro facility. 

While European bonds are mostly firmer, Portugal bonds are a notable exception. Just before the weekend Portugal’s constitutional court ruled against the government’s austerity measure in this year’s budget. This is creating an 800 mln euro funding gap. It is the sixth time in less than two years that the courts have struck down elements of the austerity program. The court ruling will likely delay the last tranche of aid under the previous program, from which it has formally exited. The final tranche is for 3.5 bln euros. 

For those who watch Portugal closely, this was a known risk and the IMF warned about in April. There are a number of potential recourses, including lifting the VAT, which is planned to be hiked slightly next year (to 23.25% from 23%) or a special levy on holiday bonuses (paid in the summer and December). 

The main data from the North American session today is the manufacturing PMI/ISM. The Markit PMI is expected to be unchanged from its flash 56.2 reading, while the ISM is expected to tick up to 55.5 from 54.9 in April. Price paid may rise to 57.0 from 56.5, according to the Bloomberg consensus. Also,April construction spending is expected to rise 0.6% after 0.2% in March. While consumption in Q4 13 and Q1 14 were strong (above 3%), it is unlikely to be sustained. However, the overall pace of growth is appears to have picked up. Inventories are unlikely to be such a significant drag and nonresidential investment is likely to be better. A favorable construction spending report today will lend support to such ideas.