Euro Sheds More Post-ECB Gains

The US dollar is mostly little changed against the major currencies. The euro is the main exception. After a halfhearted attempt to push above the $1.3600, the euro has been sold through yesterday's lows.. With positioning assumed to be more balanced after the gyrations in the second half of last week, there is some pressure to retest the low near $1.3500 seen in the knee-jerk reaction to the ECB.

The news from the euro area has been mixed. Italian industrial production offered a pleasant upside surprise, rising 0.7% in April. Economists had only expected enough to reverse March's 0.4% decline. The workday adjusted, year-over-year pace accelerated to 1.6%, which is the strongest pace since August 2011.

French data was itself mixed. On one hand, industrial production rose 0.3% against expectations for a 0.4% increase, as did manufacturing. On the other hand, the April data were revised to show a small drag. Industrial output and manufacturing fell 0.4% instead of the 0.7% decline initially reported. Figures for the euro area as a whole are due on Thursday, and the consensus is for a 0.5% increase. The disappointing German report before the weekend and the slight disappointment with France's April figures warn of possible downside risk to the region's report.

Strong UK industrial output figures may not of bolstered sterling, which is little changed on the day, but it has helped it prove resilient in the face of weaker European currencies. Industrial output and manufacturing rose 0.4%, which was in line with expectations. The year-over-year rates, however turned out higher than expected at 3.0% and 4.4% respectively (consensus 2.8% and 4.0%). The pace of output growth in manufacturing is the strongest since February 2011.

The BOE's McCafferty comments suggest that while there was still some time, the pressure was growing to begin normalizing UK rates. While cognizant that the MPC composition is changing, it continues to appear that a faction is crystallizing that favor an earlier rate hike. It appears more participants are coming over to our view of rate hike in Q1 15, which is before the May election.

Two developments from China are worth noting. First, headline price pressures strengthened. May CPI rose 2.5% from 1.8% and was a little above the consensus forecast. Producer prices fell 1.4%. The consensus called for a 1.5% decline after a 2.0% decline in April. The long decline in producer prices is slowing but to the extent that it reflects excess capacity, pressure on prices may remain. China's consumer inflation remains largely a food issue. Food prices accelerated to 4.1% from 2.3%, while non-food prices edged higher to 1.7% from 1.6%.

The second development is the yuan. The PBOC has set the fix (midpoint of the range) lower (yuan higher) for the third consecutive session. This has sparked speculation that the officials are signalling the depreciation phase has ended. The macroeconomic data--both the rise in exports reported over the weekend and today's CPI report--would be consistent with a stronger yuan. 

There are no US or Canadian data of note today and no central bank officials speaking in the US or Canada. The price action itself may be the main focus. The rally in the European peripheral bonds has continued, though Italy is a laggard today, appears to reflect in part, the return of flows that had moved into core bonds, including US Treasuries previously. US 10-year yield continues to appear to be carving out a bottom, but the 2.65% area marks a cap, which if lilfted could see yields trend back toward 2.755-2.80%. 

The euro is slipping through its 200-day moving average against the yen (just below JPY138.70). This average was frayed in late May but was not sustained on a (North American) closing basis. In fact, it has not been sustained since just before Abe was elected in Japan. This time the break seems to be real. The near-term risk is for a rested on the JPY138.00 area, though the low from earlier this year is nearer JPY136.00.