Capital Markets: "EMU Disappointment Lifts the Dollar"

From Marc to Market:

Overview: A bout of profit-taking in equities began in the US yesterday and has carried through Asia and Europe today. The MSCI Asia Pacific Index fell for the first time in five days, while the Dow Jones Stoxx 600 is snapping a six-day advance. The Nikkei gapped higher to start the week and a gap low tomorrow would undermine the technical outlook. Disappointing flash PMI data weighed on sentiment, but also is helping spur a bond market rally. The US 10-year yield is pulling back after the test on the 2.60% area. The Germany 10-year Bund yield has been halved today to four basis points. The US dollar is mostly firmer, with the yen the notable exception among the majors. News that Turkey has used dollar swaps to boost reserves has weighed on the lira, which is trading at new lows. Investors cheered the reelection of Wadodo for a second term in Indonesia. Local stocks and the rupiah are firmer.

Asia Pacific
After being spun for weeks with nearly daily claims of progress, the media is now reporting that a US-China trade deal is close. The new signal is that a couple more rounds of negotiations are all that it may take and that Trump and Xi can meet at the end of May (May 27?). US Lighthizer will go to Beijing at the end of the month, and then Vice Premier Liu will return to the US in early May. Separately, despite the recent batch of Chinese data appearing to show a recovery, there is talk about more stimulative measures.

Australia reported better than expected employment data, but the Australian dollar has not found much love and is holding near yesterday's lows. Australia created more jobs than expected (25.7k vs.15k), and these were all full-time positions (48.3k), and the February fall was revised nearly away (-1.7k vs. -7.3k). The participation rate increased, and this saw the unemployment rate tick up to 5.0% from 4.9%. Separately, the flash PMI was mixed. Manufacturing slowed to 51 from 52, while services rose to 50.5 from 49.3. The composite poked back above the 50 boom/bust to 50.6 from 49.5. Next week, Australia's Q1 CPI will be reported. It is expected to have softened.

After briefly rising through $0.7200 yesterday, the Australian dollar is near $0.7160 near midday in Europe. The employment data has not dissuaded the market from looking for a rate cut, which is priced in by the end of Q3. There is an A$1.1 bln option at $0.7175 that expires today. Support is seen in the $0.7140-$0.7150 area. The weakness in equities and slippage in yields has buoyed the yen, though its flash PMI remained below 50 for the third month (49.5 vs. 49.2). The dollar made a fresh low for the week, just below JPY111.80. With $2 bln in options struck at JPY112.00-JPY112.10, the upside looks to be blocked, but the market does not appear to have given up on it. The dollar broke below CNY6.70 yesterday on the back of the better than expected data optics but has bounced back above it today and at CNY6.7040, it is virtually unchanged on the week.

Europe
The euro has been sold on the disappointing flash PMI. Earlier in the week, reports suggest that several ECB policymakers expressed doubts about a recovery in H2, and ECB President Draghi has acknowledged the risks remain on the downside. German manufacturing continued to contract (44.5 vs. 44.1). The service PMI edged up to 55.6 from 55.4. The composite rose to 52.1 from 51.4. New business fell for the fourth month, and the export book continued to shrink. The French manufacturing PMI worsened slightly (49.6 vs. 49.7). Economists in the Bloomberg survey looked for improvement to 50. The service PMI did expand (50.5 vs. 49.1), which was actually a bit better than expected. The composite rose to 50 from 48.9....

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