US Dollar Heavy, Euro Heavier

The US dollar is starting the new week lower against most of the major currencies, save the euro and Swiss franc. Soft flash euro area PMI data and a stronger than expected flash PMI from China, set the tone.

HSBC's flash manufacturing PMI for China rose to 50.8 from 49.4. It had been expected to move above the 50 boom/bust level. It is the first time this year it has done so. Some components were still soft, such as the 2.6 point decline (to 50.6) of new export orders. Employment rose 1.3 points but at 48.7 is still contracting. One bright spot was overall new orders which rose 1.8 points to 51.8 and is the highest since March 2013.

The China news helped lift Australian dollar, which had opened the week on a softer note, extending the pullback seen before the weekend after the push above $0.9400. The Australian dollar rallied to $0.9445, its highest level since April 10, when recorded the year's high near $0.9460. The New Zealand dollar also pushed higher, reaching new seven week highs near $0.8750.

The Canadian dollar, which shot higher in the second half of last week, helped by the stronger than expected retail sales and CPI figures out before the weekend. In the middle of last week, the US dollar approached CAD1.09. Having sliced through the CAD1.08 support before the weekend, follow through selling has seen the greenback approach CAD1.07. Technically, it appears stretched. Initial resistance is seen near CAD1.0760 while the next target on the downside is pegged near CAD1.0650.

The disappointing euro area flash PMI cut short the single currency's attempt to established a foothold back above $1.36. The pullback has not been deep, with the euro holding above the pre-weekend low seen near $1.3565.

Both France and Germany disappointed expectation, but French report was particularly miserable. The flash manufacturing PMI fell to 47.8 from 49.6 (consensus was 49.5), and the services fell to 48.2 from 49.1 (consensus was 49.4). This puts the composite at 48.0, the lowest since February and the third consecutive monthly decline.

In a perverse way, it may serve the interests of the beleaguered French government that is going into the heads of state summit at the end of the week look for greater fiscal leeway to pursue some pro-growth measures. According to reports, France may seek to exclude some budget items, such as investment in energy, the digital economy and defense, from the deficit calculation for EU purposes.

German data was not nearly as disappointing, and it remains in higher levels. The manufacturing PMI ticked up to 52.4 from 52.3 (consensus was 52.5). Disappointment was greater in the service sector with a 54.8 reading, down from 56.0 (consensus was 55.8). This produced a composite of 54.2 compared with 55.6 in May.

For the euro area as a whole, the composite reading of 52.8 in June after 53.5 in May, is still seen consistent with 0.3%-0.4% quarter-over-quarter Q2 GDP. However, there is no momentum. The one bight spot was a small tick up in the price component.

For its part, sterling is trading within last Friday's trading ranges. It put in a higher in early European turnover near $1.7050 and has slipped toward $1.7010. The Bank of England quarterly survey of credit conditions found a significant increase in mortgage demand and noted banks expect demand to increase further. This further sets the stage for the Financial Policy Committee report later this week that will likely recommend tighter standards, which may curb demand and/or approval rates. The market is still poised to buy sterling on pullbacks on ideas that the BOE is positioned to be the first of the G7 to hike rates.

The North American session features the US flash PMI from Markit (May was 56.4; the Bloomberg consensus is for 56.0 in June) and May existing home sales, which is expected to have recorded a second consecutive increase after falling in all, but one month since last August.