Slow Start To A Potentially Slow Week

As US traders return to their posts from a long holiday weekend, the dollar is little changed from where they left it on July 3, following the ECB meeting and the US employment data. While the euro and sterling are within a 10-15 pips range weaker, the yen is stronger, with the greenback surrendering the foothold above JPY102. The Canadian dollar is virtually unchanged, while the Australian dollar is a bit firmer

The Swedish krona and Norwegian krone are weaker, following the Riksbank unexpectedly large 50 bp cut and disappointing data, including today's news that Norway's manufacturing output fell 0.3% in May compared with a consensus forecast for a 0.2% increase. Overall, industrial output collapsed 5.9% in May, the consensus forecast was for a 0.2% contraction. Norway's central bank does not meet until September 18. There is much data before then, but the market has begun pricing in the chances of a rate cut (deposit rate stands at 1.5%).

Spain and Germany also reported industrial output figures. Other euro zone members, such as France and Italy will report their figures later in the week and then next Monday, the aggregate figure for the eurozone will be published. The weakness in German factory orders reported last week gave little clue to the sharp drop in industrial production reported today. The consensus called for a flat to a 0.2% increase in May Instead the government reported a 1.8% decline

Compounding the disappointment, the April series was revised to show a 0.3% decline rather than a 0.2% increase. The manufacturing PMI rose from 53.7 in March to 54.1 in April slipped back to 52.3 in May. The two-month decline in industrial production underscores the loss of momentum of the euro area's economic locomotive. Growth in Q2 looks well off the 0.8% quarter-over-quarter pace seen in Q1.

On the other hand, Spain's recovery stands out. Its manufacturing PMI rose to 54.6 in June from 52.8 in March. On a seasonally adjusted basis, industrial output for 2.5% year-over-year in May. Although it is a bit below the Bloomberg consensus, it is still one of the strongest gains in the last few years.

Separately, the Eurozone Sentix survey ticked to 10.1 from 8.5 in June. The consensus had expected a small decline. This seemed to help the euro recover from a 7-day low recorded in Asia near $1.3575. A band of support is seen in between the $1.3565-$1.3580. A move above $1.3610 is needed to lift the tone, but additional resistance is seen in the $1.3625-40 area.

The U.S. 10-year yield had approached 2.70% in the immediate aftermath of the stronger than expected jobs data, but failed to sustain the gains and is now just below 2.65%. The dollar’s movement against the yen is tracking the Treasury yield. The post-jobs data dollar high was set just shy of JPY102.30. On the downside, the 5- and 20-day moving averages converge near JPY101.90, and additional support is seen near JPY101.75.

Sterling reached new cyclical highs on July 4 of $1.7180, but it is trading a bit heavier today. Tomorrow the UK will report its industrial production figures (consensus is for a 0.3% increase with a 0.4% rise in manufacturing output). This is followed by trade figures on Thursday, the same day as the BOE meeting (no change is expected, and the decision is likely to be unanimous).

A rather subdued week for North America begins slowly, with no US data or Fed speeches today. Canada reports building permits (2% rise is expected) and the June IVEY (expected to rise to 52.0 from 48.2) and the Senior Loan Officer Survey. Since June 5, only one major currency has outperformed the Canadian dollar’s 2.6% rise, and that is the New Zealand dollar (2.8%), which has been bolstered by the country's central bank engaging in a tightening cycle. We suspect the move is nearly over, but it does not preclude another push lower for the US dollar toward CAD1.0580-CAD1.0600. A move above CAD1.0680-CAD1.0700 would help confirm a low is in place.