Via Marc Chandler at Brown Brothers Harriman:
European Economic Thaw Continues, but Dollar Remains Firm
- The US dollar remains bid as liquidity begins to slip away from the foreign exchange market, not to return until April 7; ADP and ISM manufacturing in focus for the US today
- China reported better-than-expected official PMI data for March, but Japan’s Tankan Survey was disappointing
- Meanwhile, the cyclical recovery in the euro area continues, while Norwegian data was disappointing
- Korea data was weaker across the board today
Price action: The dollar is mixed against the majors, trading in narrow ranges ahead of the Easter holidays. CHF and EUR are up slightly, while NZD and NOK are underperforming and down on the day. The euro is trading near $1.0750, while cable is edging lower to trade near $1.4760. Dollar/yen is back above 120 after falling as low as 119.40 during the Asian session. EM currencies are mostly firmer, with KRW and ZAR outperforming and RUB and TRY underperforming. China PMI readings came slightly in firmer than expected, boosting the Shanghai Composite 1.7% on the day. Yet MSCI Asia Pacific fell for the fifth straight day, down 0.5% and led by nearly 1% declines in the Nikkei and Taiwan’s TAIEX. Euro Stoxx 600 is up 0.8% near midday, while S&P futures are pointing to a lower open.
- The US dollar remains bid as liquidity begins to slip away from the foreign exchange market, not to return until April 7. The inability of the euro and especially sterling to trade higher despite favorable economic news is noteworthy. At the same time, the Nikkei’s fall (0.9%) after a similar slide in the S&P 500 yesterday (and a lower opening projected today) has failed to keep the dollar below JPY120.
- The US session features the ADP employment estimate (225k expected after 212k in February), ISM manufacturing (52.5 expected, down slightly from February’s 52.9), and March auto sales (expected to snap a three-month softening streak and rise to 16.9 mln unit pace from 16.16 mln). Investors have come to accept that Q1 growth in the US was poor, and like last year, weather was an important drag. The West Coast port shutdowns also played a role. In addition, after posting its best quarterly advance in a decade, consumption also eased (and weather was likely a factor as well). The headwinds are expected to prove transitory and with warmer weather, an economic rebound is expected.
- The dollar posted strong Q1 gains. The main exception was the Swiss franc, which rose 2.2% against the dollar and was the strongest of the major currencies following the SNB’s decision to lift the currency cap. The yen also fared well, losing only 0.3% against the dollar. The euro saw its largest quarterly decline of its brief history, falling 11.3%. After the dollar’s upside ran out of steam a couple of weeks ago, the market appears to be searching for a new range. These ranges look like something like $1.0680-$1.1050 in the euro, $1.46-$1.50 in sterling, and JPY118-JPY121 for dollar-yen.
- China reported its official PMI data for March. Manufacturing PMI increased to 50.1 from 49.9. This is a bit better than the market expected, and suggests large businesses are coping better than small businesses with the economic transition given that the HSBC manufacturing PMI final reading was at 49.6 (which gives more weight to small businesses). The final HSBC reading was better than the flash estimate of 49.2. This was sufficient to keep China’s equity advance intact, and the Shanghai Composite rose almost 1.7%.
- Japan’s Tankan Survey was disappointing. It follows last week’s news that inflation had fallen to zero. The recovery from last April’s sales tax increase continues to be lackluster. There was no improvement in sentiment among large manufacturers (12), which was slightly weaker than expected, and the expectations for June stand at 10. The non-manufacturers saw modest improvement, but the June projection is for some slippage. Also disappointing was the all industry capex plans. Japanese companies project cutting capex by 1.2% this fiscal year that begins today. The consensus expected a 0.5% increase. Japanese officials, however, are sounding more like cheerleaders, looking past the disappointing data. Nevertheless, many are still expecting the BOJ to step up its efforts.
- The cyclical recovery in the euro area continues. The March manufacturing PMI rose to 52.2 from 51.9 of the flash and 51.0 in February. It is a ten-month high. The forward looking new orders component stands at an 11-month high. Germany and France improved from their flash readings, though France remains below the 50 boom/bust line and is the true laggard in the region. Italy also surprised to the upside (53.3 vs.52.1 expected and 51.9 in February). Spain was steady (54.3 from 54.2).
- The euro saw its high in Asia just shy of $1.08. However, it could not sustain the upticks, despite the constructive data. Sterling’s performance is the same but more so. Sterling poked through $1.4870 in Asia, but even a constructive manufacturing PMI (54.4 from a revised 54.0 in February—initially 54.1) failed to lend sterling any support. It briefly was pushed through yesterday’s low before finding a bid near $1.4740. Deeply held ideas that the economic data will not spur BOE action and the uncertainty surrounding next month’s election leaves sterling with few friends. Tomorrow evening will be the televised debate between the candidates.
- On the other hand, Norway saw a dismal manufacturing PMI and the krone was punished. The March PMI fell to 48.8 from a revised 50.9 (initially 51.2). The krone has lost about 0.5% against the dollar and 0.6% against the euro. There is potential for additional krone weakness as the market begins pricing the risk of easier monetary policy.
- Lastly, we note that oil prices remain heavy. Negotiations over Iran’s nuclear development appear close to a conclusion, which could see their oil exports increase rapidly. In addition, surveys (Bloomberg and Reuters) suggest OPEC output increased in March. The EIA reports US oil stocks today, and expectations are for a 4.2 mln build. Inventories have risen for 11 consecutive weeks.
- Korea data was weaker across the board today. March CPI came in at 0.0% m/m, slightly lower than expected, reinforcing our view that there may be more easing in store down the line. March trade was even more downbeat with exports falling -4.2% y/y, compared with -1.9% y/y expected, while imports were down -15.3% vs. -12.1% expected. February current account will be reported Thursday. Despite the data, the external accounts are not an issue for Korea. Indeed, the rising surpluses are positive for the won, though this will likely be offset by worsening of the capital account.