Dollar Mixed, but Resilient Undertone

The holiday-mode cast a pall over trading activity. Movement has been limited. Bonds are mostly firmer and equities softer. The dollar is mixed. News has been light.

There have been two economic reports to note:  The Japanese November trade figures and the German IFO survey.  

Japan's trade November surplus of JPY152.5 bln was smaller than the October's JPY496.2 bln.  That is the typical pattern for Japanese merchandise trade, which has clear seasonal patterns.  Over the 20 years, there have been only two exceptions to the pattern in which the November balance deteriorates from October.  On the other hand, December improves over November in 16 of the past 19 years.  

The details were also mildly encouraging.  Exports and imports were still contracting on a year-over-year basis (-0.4% and -8.8% respectively), but this is the least this year and suggest improvement is likely next year.  

After trading to JPY118.40 before the weekend, the dollar was sold in Asia, hitting JPY177 before bids emerged in early European activity.    The JPY117.60 level was approached by midday in Europe, but the buying dried up.    There is scope for a move toward JPY116.70 in this corrective phase.   Elsewhere, we note that the Nikkei finished fractionally lower, but the operative word is lower, as it snapped a nine-session advance.  Still, the close was near session highs, suggesting buyers took advantage of the pullback.  The BOJ two-day meeting concludes tomorrow, and few are looking for fresh initiatives.  

The German IFO survey shows modest improvement; reinforcing the sense that after a soft Q3 the European engine strengthened in Q4.  The overall climate improved to 111.0 from 110.4.  The assessment of current conditions rose to 116.6 from 115.6, which is the best in four and a half years.  The expectations component edged to 105.6 from 105.5.  The recent peak was 106 in October.  

The euro held above $1.04 before the weekend, after reaching almost $1.0365 the day before.  It rose to $1.0480, but European participants took it back to $1.0430.  Initial support in North America is seen in the $1.0400-$1.0420 area.  A key driver has been the diverging direction of short-term interest rates, with the US two-year yield moving to new multi-year highs, while the German two-year yield is slipping to new record lows.  However, today the spread narrowed slightly today.  

We note that the two hot spots in Europe are doing ok today.  Greece's 10-year yield has eased a few basis points, and although Italian bank shares are lower (~-0.5%), they are faring a bit better than the bank index of the Dow Jones Stoxx 600 (~-0.7%).  The Italian premium over Germany has narrowed slightly.  However, Monte Paschi's share sale is not off to a particularly encouraging start as it tries to raise as much as five bln euro. There is the talk of government participation in the share sales.  

Sterling failed to establish a foothold above $1.25 and has drifted off.  It is within the pre-weekend ranges.   Support is likely to be encountered in the $1.2400-$1.2420 area.    The 50-day average is found near $1.2415, and sterling has not closed below this average since late November.  We suspect the selling pressure may have largely exhausted itself in the European morning.  

The dollar-bloc is soft.  The greenback looks as if it wants another go at CAD1.3420, while the Aussie's foray above $0.7300 has been repulsed and a break of the six-month low seen before the weekend near $0.7265 would spur a move toward $0.7200-$0.7220.  

We do not ascribe much market moving potential to the Markit service and composite US PMIs today.  Nor will Yellen's commencement speech likely provide fresh insight or incentives for market participants.  The underlying bullishness toward the dollar meets corrective pressures, light participation, and the absence of much new information.  



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