It is more than interesting to note that the USD is able to thrive despite strong risk appetite yesterday. It certainly makes sense to see strong data pushing the USD/JPY pair higher, given the idea that the Fed is mulling eventual exit strategies provided data improves. Japan is bent on fresh central bank activism, but the strong data and risk response diverges from the behaviour we got so used to in the previous market regime. At the same time, what doesn’t necessarily make sense is to see a strong US bond market when we are seeing strong US data, so there is still more than a bit of a disconnect across markets in trying to extract meaning from what is going on…
More Japanese deflation
It's ironical to see Japan posting its most deflationary core CPI reading for the last 12 months, almost a year after the BoJ “declared war” on deflation and the JPY significantly begun to weaken. Looking back at the record, it is worth noting that the core inflation rate only exceeded zero for a few months back in early 2008, when the JPY was far weaker than it is currently (remember EUR/JPY at 160, GBP/JPY at 200 and USD/JPY at 110?) and commodity prices /spiked much higher. The BoJ will need to do some heavy lifting indeed to change the dynamic. The JPY was perhaps weaker on the back of this data as the market believes it brings forward more forceful action from the BoJ/Abe administration.
Manufacturing PMI’s
A welter of Manufacturing PMI’s out overnight and this morning. The Chinese data points were discouraging, but again, we have the Chinese New Year effect to consider so we need to wait another month for a better read. In Europe, Spain’s PMI improved to a still recessionary 46.8, the best data point in almost 2 years, but what is remarkable is that these surveys are comparative by nature, so things are not necessarily getting better as much as worsening at a slower pace. Other noteworthy PMI’s this morning were out of Italy – ruining the “good news” out of Spain and then Switzerland, where disappointment may be feeding again into a weaker CHF . Note in the chart below that USD/CHF is nudging multi-month highs.
Chart: USD/CHF
The USD/CHF is poking at multi-month highs in the 0.9300’s and the 200-day moving average looms a bit above 0.9400. This is an especially interesting trade if Europe can get out from under the shadow of the Italian election result -1.2250 seems to be an interesting pivot area in the EUR/CHF pair. Eventually, I am looking for a strong move back above parity, which the pair almost hit last summer. Downside support comes in at 0.9300/0.9250.
USD/CHF" title="USD/CHF" width="455" height="291">
We can look forward to the US ISM survey and final University of Michigan confidence reading for February later. Theoretically, the ISM shouldn’t surprise to the downside given the mix of strong regional surveys (ex-Philly Fed) we’ve seen of late, although last month’s ISM seemed stronger than the regional surveys suggested, so there may be a bit of mean reversion - and this may be why expectations are for a slightly weaker reading than last month’s 53.1.
Economic Data Highlights
- Australia, February: AiG Performance of Manufacturing Index out at 45.6 vs. 40.2 in January.
- Japan, January: Jobless Rate dropped to 4.2% as expected and vs. 4.3% in December.
- Japan, January: Overall Household Spending rose +2.4% YoY vs. +0.4% expected and -0.7% in December.
- Japan, January: National CPI out at -0.3% YoY vs. -0.2% expected and -0.1% in December.
- Japan, January: National CPI ex Fresh Food and Energy out at -0.7% YoY as expected and vs. -0.6% in December.
- China, February: Manufacturing PMI out at 50.1 vs. 50.5 expected and 50.4 in January.
- China, February: HSBC Manufacturing PMI out at 50.4 vs. 50.6 expected and 52.3 in January.
- UK February: Nationwide House Prices rose +0.2% MoM and 0.0% YoY vs. +0.2%/-0.2% expected, respectively and vs. 0.0% in January.
- Germany, January: Retail Sales out at +3.1% MoM and +2.4% YoY vs. +0.9%/-1.7% expected, respectively and vs. -3.7% YoY in December.
- Sweden, February: Swedbank PMI out at 50.9 vs. 50.0 expected and 49.2 in January.
- Norway, February: PMI out at 48.3 vs. 50.9 expected and 50.1 in January.
- Spain, February: Manufacturing PMI out at 46.8 vs. 46.3 expected and 46.1 in January.
- Sweden Q4 GDP out at 0.0% QoQ and +1.4% YoY vs. -0.8%/+1.1% expected, respectively and vs. +0.7% YoY in Q3
- Switzerland February: Manufacturing PMI out at 50.8 vs. 52.1 expected and 52.5 in January.
- Sweden Q4 Current Account out at 62B v. 63.3B in Q3
- Italy, February: Manufacturing PMI out at 45.8 vs. 47.6 in January.
- France, Final February Manufacturing PMI reading out at 43.9 vs. 43.6 initial estimate and vs. 42.9 in January.
- Germany, Final February Manufacturing PMI reading out at 50.3 vs. 50.1 initial estimate and vs. 49.8 in January.
- Italy, January (prelim.): Unemployment Rate rose to 11.7% vs. 11.3% exp. and 11.3% in December.
- Norway February: Unemployment rate out at 2.7% vs. 2.6% expected and 2.7% in January.
- UK February PMI Manufacturing (0930)
- UK January Mortgage Approvals (0930)
- Eurozone February CPI Estimate (1000)
- Eurozone January Unemployment Rate (1000)
- Canada December GDP (1330)
- US January Personal Income and Personal Spending (1330)
- US January PCE Deflator/Core (1330)
- US February Final University of Michigan Confidence (1455)
- US January Construction Spending (1500)
- US February ISM Manufacturing (1500)
- US Fed’s Bernanke to Speak (Sat 0300)
- China February Non-manufacturing PMI (Sun 0100)
- Australia January Building Approvals (Mon 0030)