Euro Slips as Big Week Starts Slowly

The US dollar is narrowly mixed to start the new week.  Both Tokyo and London markets are closed today making for somewhat lighter turnover.  The dollar has been confined to about a quarter of a yen above JPY120.00.  

It is the euro that stands out.  It has lost almost 0.5%, has dragged the Swiss franc with it.  Recall at the end of last week, the euro was fairly resilient to the US dollar's recovery.  There is a bit of catch-up going on as European dealers returned from their May Day holiday.  

The euro area manufacturing PMI was in line with expectations and edged above the flash 51.9 to 52.0.  In March,it stood at 52.2.    Investors have already taken on board that growth has accelerated in the region.  What is new is that the deflationary forces are ebbing.  This was seen in the March CPI print that ended a streak of three consecutive negative year-over-year readings.  The April PMI showed that manufacturers raised prices for the first time in eight months.  The increase in average selling prices is not very broad, limited to Germany, Italy and Ireland, but may be the beginning of a trend.  Input costs increased for the second consecutive month after falling for half a year.  In Spain input prices area at their highest level since the end of 2012.  In Italy, input prices are at nine month highs. 

In terms of manufacturing itself, France continues to disappoint.  Its manufacturing PMI slipped to 48.0 from 48.4 in the flash.  It is down from 48.8 in March and a little below the Q1 average.  In contrast, the German reading was revised up to 52.1 from 51.9.  It stood at 52.8 in March.  It is slightly above its Q1 average.   Spain remains largely steady at a high level (54.2 vs 54.3).  Italy offered a pleasant surprise.  The manufacturing PMI rose to 53.8 from 53.3, which is the highest since last April. 

Pressure is still on euro area bonds after last week's rout.  German and French 10-year yields are 3-4 bp higher.   Spanish and Italian yields  are 8-110 bp high.  On the other hand, equity markets are higher, with the DAX leading the way, up almost 0.9%.  The Dow Jones Stoxx 600 is up 0.4%, led by telecoms and energy.  

On May Day, the euro pushed to almost $1.13 and was turned back from the 100-day average.  It finished the week at $1.12.  An attempt to rally fizzled in Asia near $1.1225.  European dealers have taken it steadily lower.   Support is seen in the $1.1070-$1.1100 area. 

Sterling peaked in the middle of last week near $1.5% but sold off to finish the week near $1.5150.  Today it has held above the pre-weekend low of $1.5115.  Last week's low, set last Monday, was a little below $1.5110.  The manufacturing PMI was disappointing, but nervousness over the election is palpable.  One week implied volatility is higher now than on the of the Scottish Referendum.  The one-month has been above last September's peak since the beginning of last month.  Three-month implied vol has been above that peak since late-January. 

Both Norway and Sweden reported stronger PMIs, and this may be helping their respective currencies outperform here today.  Sweden's manufacturing PMI rose to 55.6 from 54.1.  The market had feared a decline.  Next week is the more important CPI report.  The euro has retraced all of its pre-weekend gains against the krona.  Support is seen in the SEK9.30-SEK9.32 area. 

Norway's manufacturing PMI rose to 50.5 from 48.6, which is more than expected.  It is not that the central bank necessarily puts much emphasis on this kind of data, but under conditions that made this week's policy decision a close call, the recovery in the PMI tilts the scale a bit against a cut.  The krone has also recouped the ground lost to the euro before the weekend.    Euro support is pegged in the NOK8.42-NOK8.44 area. 

The Reserve Bank of Australia meets tomorrow.   Building approvals were stronger than expected in March (2.8% vs -1.5%) and the February decline was halved to -1.6%.  However, this has been insufficient to turn market sentiment.  The OIS market is discounting about an 80% chance of a 25 bp rate cut tomorrow.  One news wire poll had 24 of 28 respondents expecting a cut.   The Aussie peaked last week near $0.8075 before finishing the week just above $0.7850.  Bids emerged ahead of $0.7800.  Key support is seen in the $0.7750-70 area. 

March US factory orders are unlikely to move the market though a consensus 2% increase would be the best since last July.  Ahead of the jobs data (ADP Wednesday and BLS on Friday), speeches by the Federal Reserve will garner attention.  Mester has already signaled that lift-off is drawing near.  Today the focus is on Tarullo, Evans and Williams.  Tomorrow Kochlerlakota speaks, followed by Yellen and George mid-week.