Dollar Mixed, But Different Than Last Week

The US dollar is beginning the new week on mixed footing, though the mixed performance is somewhat different than last week. The euro and Swiss franc are heavier, while the Antipodean currencies are stronger. On the other hand, in continuity with last week, sterling has continued to march ahead, while the yen remains on its back foot.

Initially the market attempted to push the euro through the $1.3620 area that stalled it last week. This failed and left some short-term momentum traders leaning the wrong way. There does not appear to have been a fundamental catalyst for the euro's nearly 3/4 a cent drop in the European morning. Initial support is now seen near $1.3530 and a convincing break would signal a potential test on the $1.3480 area.

The main news was the euro area manufacturing PMI, which ticked up from the 51.5 flash reading to 51.6, which is the highest reading since June 2011. Both the German and French readings were revised higher from the flash, though the latter, at 48.4 (from 47.8 flash) remains below the 50 boom/bust level. Germany's stands at 52.7 from the 52.5 flash reading and is the best level in 2.5 years. Spain fell to 48.6 from 50.9 and is the first decline in four months. Output and new orders notably fell. Recall that the IMF recently cut its outlook for Spanish growth next year to flat from 0.7%. Italy rose to 51.4 from 50.9 as output increased for the sixth consecutive month and new orders also rose.

For its part, the UK report shows a stronger than expected CBI manufacturing survey. The 58.4 reading contrasts with expectations for an unchanged report at 56.0, which itself was revised up to 56.5. Employment, which has taken on added significance given the BOE's forward guidance, rose to new 2.5 year highs. The forward looking new orders sub-index jumped to 64.6 from 61.3, its highest level in nearly 2 decades.

Last week, sterling shot through the trend line that is drawn off the 2009 and 2011 highs. It had been approached a few times earlier this year. There was follow-through buying in early Asia to just above $1.6440, but sternling has, like the euro, steadily moved lower in Europe, despite the data. Initial support is now pegged in the $1.6330-50 area. The short-sterling futures curve implies the first rate hike in late 2014 or early 2015.

Separately, we note that Switzerland, Sweden and Norway's manufacturing PMI readings were all better than expected. The only currency that has shown any strength has been the Swedish krona, perhaps because some expect the Riksbank to cut rates later this month after the soft CPI figures last month (deflation) and the disappointing Q3 GDP figures released at the end of last week (0.1% vs consensus of 0.5%). The euro initially lost about 0.5% against the Norwegian krone in response to Norway's strong report, in which forward looking orders rose to 60.5, the highest since March 2012. However, the euro quickly rebounded from near NOK8.28 back to toward the session highs near NOK8.33.

The Swiss franc drew no succor from the rise in the Swiss manufacturing PMI to 56.5 from 54.2. It has been above 50 since April. Whatever uptick the franc enjoyed following news that the S&P cut the Dutch credit rating to AA+ from AAA proved fleeting. In fairness, though, the Dutch bond market showed little reaction to the news. The yield on the 10-year Dutch bond is up about 3 bp today, which is the same as Germany and France.

Japan reported disappointing capital spending figures for Q3. The 1.5% increase is better than the flat reading in Q2 and the decline in Q1, but it is less than half of the 3.6% consensus forecast. Even when excluding software, the 2.3% increase was about half of what was expected. On the other hand, corporate profits edged up to 24.1% from 24.0% in Q2. Separately, we note that the latest Asahi poll found the approval rating of the Abe government has fallen below 50% for the first time. The bill passed the lower chamber last week and will likely pass the upper chamber this week; It boosts penalties for leaking confidential government information and appears to have taken its toll.

The Australian dollar is enjoying a firmer tone, helped by what we argued were improving technical considerations, stronger China manufacturing (including the upward revision to the HSBC flash measure), and a smaller than expected decline in building approvals. Building approvals fell 1.8% in October, while the consensus had forecast a 5% drop. The September series was revised higher to show a 16.9% rise rather than 14.4%. In addition, the 0.5% decline in inventories reported for Q3 (consensus was for a flat report), may see Q4 GDP forecasts edge higher.

The Aussie initially rallied a half cent from its opening level near $0.9115. However, it too lost the upside momentum by early Europe and drifted lower. Support is seen at $0.9100-$0.9120. The pattern has been largely the same for the New Zealand dollar, but it is holding up better. The jump in the terms of trade in Q3 by 7.5%, more than twice what the consensus expected (2.9%), largely reflect higher milk prices.

The North American session features the manufacturing ISM (and the final PMI), construction spending (October) and an early speech by Bernanke. Bernanke speaks to students and is unlikely to be very revealing. The Bank of Canada meets tomorrow (as does the RBA). The stronger than expected Q3 GDP report before the weekend has failed to stem the pressure on the Canadian dollar. It is trading at two-year lows against the US dollar today.