Dollar-Bloc and Sterling Advance, while Euro and Yen Slip

The US dollar is mixed.  After a soft start in Asia, where Tokyo markets were closed, the dollar recovered smartly against the euro and yen.  The dollar-bloc and sterling are firmer.  Sterling's earlier losses were recouped following news that the manufacturing PMI jumped to 56.1, its highest since June 2014.  

Rising global yields with the US 10-year Treasury yields up five bp today, and European yields up 5-8 bp, while equities firm, may be a factor driving the yen lower.   The yen's 0.5% fall is the most among the majors today, sees the dollar resurface above JPY118 to its best level since December 20.  

Excluding Japan, the MSCI Asia Pacific Index gained 0.4%, and it’s the sixth consecutive gain.   Of note, the Shanghai Composite rose a little more than 1%, and Australian equities rose 1.2% to lead the region.  European bourses are higher, and the Dow Jones Stoxx 600 is up 0.7% near midday in London, led by financials and energy.  It is the third consecutive advancing session and sixth in the past seven sessions.  Italian banks shares are up nearly one percent after yesterday's 2.25% gain.  Last week's 2.8% drop, snapping a four-week rally, has been recouped.  

In addition to the UK's manufacturing PMI, there are three other economic reports to note.  First, preliminary French December CPI rose 0.3% for a 0.8% year-over-year pace.  While better than November's 0.7% year-over-year pace, it was a touch below expectations.  It appears that energy was the main driver.  Service prices, a proxy for domestic price pressures, eased to 0.9% from 1.0%.  

Second, German inflation jumped as a function of the sharp rise in December and a base effect.  All of the German states have reported their December figures, and they all rose 0.7% or 0.9% in the month.  The year-over-year rates more than doubled to 1.7%-1.9%.    Baden-Wuerttemberg was the notable exception.  Its 0.7% rise on the month translates into a 1.6% year-over-year pace from 0.8% in November.  The national figure is due shortly.  The risk may be on the upside to the Bloomberg median guesstimate of 0.6% on the month and 1.3% year-over-year rate.  

Third, Germany also reported a 17k decline in its December unemployment queues.  This was three-fold larger of a decline than the median expected, and the largest since last January.  The unemployment rate was unchanged at 6%, which is the lowest since reunification.  

In North America, Markit and ISM report December manufacturing PMI.  The preliminary Markit measure ticked up to 54.2 from 54.1, which is the highest since March 2015.  The ISM measure is expected to rise to 53.7 from 53.2.  That would be the highest since January 2015.    Separately, the US also reports November construction spending.  A gain of 0.5%, as the median forecast has it, would be the second consecutive gain of that magnitude and the fourth in five months.  It shows some acceleration from the trend.  The 12-month average 0.3%. The Fed's speaker calendar is light until the end of the week when both Evans and Lacker take to microphones.   Canada's RBC manufacturing PMI will be released.  It stood at 51.5 in November, which is a four-month high.  

Thin market conditions prevail.  Our reading of the technical condition underscored the risk of further corrective action on the dollar.    Although the euro drifted to briefly trade below $1.04 were are hesitant about abandoning this near-term technical view.  However, a break of $1.0370-$1.0380 would prompt a reconsideration.  The dollar's gains against the yen are a bit more impressive.  There is little in the way of the December high strike near JPY118.65.  Support is now seen near JPY117.65.  The hourly RSI is elevated but has yet to turn down.   Sterling's PMI-inspired bounce ran out of steam near $1.2300.  Support is seen near $1.2240.   The Australian dollar is straddling $0.7200, but the intraday technicals suggest it can return to the session highs near $0.7235.   The Canadian dollar is firmer but is not drawing much succor from the 2% rally in oil prices as OPEC cuts begin.  The US dollar is holding above CAD1.34.  Resistance is seen near CAD1.3450. 

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