Dollar Mixed to Start Week

The US dollar is narrowly mixed as over-extended technicals, and the lack of fresh developments, keep the bulls at bay.   The nearly 2% drop in gold price to new five-year lows is a talking point today.  The relaxation of tensions both in Greece and China reduce the haven interest.  At the same time, the prospect of higher US and UK rates increase the opportunity cost of holding a non-income bearing asset.  

It is a big day for Greece, but without the drama that has characterized the past few weeks.  The EFSF bridge loan has been made, and in essence the Greek government turns the check over, endorses it, and gives it back to the IMF and ECB.  Greek banks have re-opened after the three-week holiday.  Capital controls remain in place (with 420 euro weekly cap in lieu of more rigid 60 euros a day) and the stock market remains closed.   Unless negotiations proceed quickly for a third assistance program, another bridge loan may be needed for next month's debt servicing.  

The news stream is light.  Japan's markets were closed for Ocean Day.  The highlight from the European session was the May current account surplus of 18 bln euro s on a seasonally adjusted basis, which is the smallest since last November.   It is not a market mover.  Recall that that combination of the compression of domestic demand throughout the euro area, which is drag on imports, and deflationary forces and euro weakness, which boosts exports, flatter the external accounts.  On top of this, is the German export machine.   It is a light day/week for the North American economic calendar as well.  

The euro's bounce ran out of steam just above $1.0860.   A new low, below $1.0820.  This area corresponds to the low from late-May and could be the neckline of a double top pattern (May and June highs (~$1.1465 and $1.1435).  If this is a valid pattern, the projection on violation is near $1.02.  Sterling is trading at four-day lows and short-term UK rates are a touch softer.  The $1.5540 area has not been convincingly broken, but if/when it is, the potential exists toward $1.55 and possibly $1.5470 before buyers return ahead of the MPC minutes in the middle of the week (and retail sales on Thursday). 

The dollar has pushed higher against the yen.  The streak of higher highs and higher levels is extended into the seventh session.  The market is flirting with the late-June highs near JPY124.40, encouraged by the rally in stocks and firm US Treasury market. 

The dollar-bloc currencies are mixed.  The New Zealand dollar popper higher following comments by Prime Minister Key acknowledging that the Kiwi has fallen faster than expected.  It has been toying with the $0.6500 area and the short squeeze lifted it to $0.6600.  Support now is seen near $0.6560.  The RBNZ is expected to cut rates 25 bp Thursday (some speculation of a 50 bp move) and leave the door open to additional cuts.   Given the perceptions of linkages between the Australian dollar and gold, the former has held up well despite sharp drop in the latter.  The Aussie initially made new multi-year lows, dipping briefly below $0.7330 before rallying back to near $0.7400. For its part the Canadian dollar is trading heavier as the greenback remains near CAD1.30. 

Chinese stocks traded firmer in less volatile activity.  The Shanghai Composite gained a little less than 1% and was confined to a 2.4% range, the narrowest in over a month.  The Shenzhen Composite rose 1.8%.  It is notable that despite government efforts focused on large-cap stocks, the smaller companies have outperformed handily.  Over the last five sessions, the Shanghai Composite has risen 0.5%, while the Shenzhen Composite is up 5.2%.  According to a Bloomberg report, 20% of the mainland listings are still closed.  The frozen shares have an average p/e ratio of 243, while the overall average for Shanghai and Shenzhen is 164. 

European shares are building on last week's gains.  The Dow Jones Stoxx 600 is up about 0.8% near midday in London, led by information technology and health care, but all sectors are advancing.   European bonds are also rallying with peripheral bond yields off 4-5 bp and the core is off 2-3 bp.  UK gilts are under-performing and are largely steady.  US Treasury yields have drifted a little higher. 

The strong pre-weekend advance in the US NASDAQ to new record highs was driven by Google and Facebook.  Six S&P 500 companies report earnings today including Halliburton and IBM.  Apple reports tomorrow. 

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