Dollar Consolidates in Choppy Activity

The US dollar is mixed.  It has recovered from an early spike to JPY116.65 in early Asia to tested the JPY117.80 area.  The euro briefly dipped below $1.1300 before Spanish and Italian PMIs surprised on the upside.  Sterling bounced on a stronger PMI report but hit a wall of selling that pushed it back toward $1.50 before bids returned.  The dollar-bloc is mixed.  Some short-covering ahead of the Reserve Bank of Australia's decision tomorrow helped lift the Australian dollar to $0.7800 and a little more, while the decline in oil prices is a handy excuse to sell the Canadian dollar, especially after the negative GDP print before the weekend.  

The euro zone manufacturing PMI was in line with the flash reading of 51.0.  It is the highest since July.  German and French flash estimates were revised lower (Germany to 50.9 from 51.0 and France to 49.2 from 49.5.   This was offset in fully by the upside surprises in Italy (49.9 from 48.4 and consensus of 48.8) and Spain (54.7 from 53.8 and 54.1 consensus).  The data supports our idea that a cyclical low is likely in place, even though deflationary forces have not peaked.  Last week's Spanish data showed an upside surprise on retail sales and a larger than expected fall in prices.  On Thursday, the eurozone December retail sales may surprise to the upside (consensus flat) after both France and Spain posted stronger than expected reports.  The decline in prices may increase the debt burden, but it does not appear to be deferring consumption.  

The UK's manufacturing PMI rose to 53.0 from 52.7 in December, which was revised from 52.5.  It was slightly above expectations.  While this is a constructive development, the fact that prices fell to 49.0, the lowest since September 2009, seemed to prevent a change in sentiment.  Short-sterling futures were unchanged.  Sterling is the weakest of the majors next to the Swiss franc. 

Recall that the franc was the weakest of the majors last week.  It has continued its weak profile today.  Over the weekend, A Swiss paper claimed in an unsourced story that the SNB is adopting a unofficial CHF1.05-CHF1.10 corridor.  It is not clear what an unofficial corridor means.  Will it defend it?  Does such a story get the market do to its heavy lifting for it ?  That said the euro is at its highest level against the franc since the SNB removed the cap.  The next key technical level is seen near CHF1.08.  

Greek officials are visiting European counterparts.  The frustration is not that the new government wants to move away from the austerity regime.  In that, there is much support in France, Italy and the large weekend demonstration in Spain.  The problem is that the new Greek government has not unveiled concrete alternative proposals.  It is still in the early days, but given the end of the current aid extension at the end of the month, time is of the essence.  The new government suggests it needs until May to work out a new deal with the official creditors wants the ECB to extend credit to the Greek banks until then.  

The ECB is reluctant to do so, and the way it pressured Ireland and Cyprus in the past suggests it will drive a hard bargain.  A decision this week is expected on the ELA request the same day that Greece rolls over maturing T-bills.   Greek stocks are up about 5% today and the 10-year bond yield is 36 bp lower at 10.43%.  Greece's January manufacturing PMI fell to 48.3 from 49.4 in the run-up to the election, during which time capital fled the country. 

There were two by-elections over the weekend.  In Australia, the government's candidate lost in Queensland, but the focus is on tomorrow's RBA meeting.   On balance, sentiment has shifted away from a cut tomorrow; but rather than take it back, is pushing it into March.  That said, there have been many surprises in recent months and they have all been in direction of easier monetary policy.  

The by-election was in Doubs, France to fill Moscovici seat now that he has joined the EC.  The National Front came in first, but without a majority.  This will necessitate a run-off next Sunday.  The Socialist candidate came in second and made it into the run-off.  The UMP candidate was trumped, and this is a setback for Sarkozy's political comeback.  That said, a low turn-out and poor weather makes it difficult to read too much into the results. 

Another winter storm in the US may make for a lighter North American session.   The Q4 GDP estimate reported last week incorporated the December personal consumption data that will be released today.  The core PCE deflator may have ticked down to 1.3% from 1.4%.  Barring a significant surprise December construction spending may also been seen as old news.  The January manufacturing ISM may have slipped as the Markit PMI already indicated.