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The U.S. dollar is consolidating its earlier gains. The New Zealand rate cut got the ball rolling, and Japan followed with news of its first decline in exports, an important source of growth, in nearly five years. The eurozone reported weaker-than-expected flash PMI reports, and Germany's IFO crashed to three-year lows. The U.K. did its part by reporting its largest drop in retail sales in at least 22 years. Cross-rate activity is helping underpin the yen and Swiss franc.
The general tone of the dollar has improved in recent sessions, helped by the decline in oil prices, hawkish
comments, greater confidence that U.S. officials will not permit the demise of
and another round of bank earnings without major casualties.
Poor data from Japan and Europe helped extend the dollar's gains, but its momentum ended abruptly after the euro, for example, fell through its 100-day moving average at $1.5655 today and snapped back. The price action today is like a boxer hitting his opponent with a fully extended arm. There is talk of a bid coming from sovereign wealth funds. Valuation of currencies is notoriously difficult, and as proxy, it is often thought about as a function of price and time. The euro has traded below its 100-day moving average about 10 days this year before today, and each time it has provided a buying opportunity. Yet the economic news stream and shifting views of the trajectory of monetary policy suggest the need to tread carefully.
The flash eurozone PMI reports warn that the region's economic weakness probably deepened in the second quarter. Yes, this is only a preliminary report for July, but forward-looking components like new orders and confidence measures were weak, and both continued to move further below the 50 boom/bust level. The manufacturing reading fell to 47.5 from 49.2, compared to the consensus forecast of 48.7. The services PMI fell to 48.3 from 49.1 amid expectations for a 48.8 reading.
German reports were poor, as the manufacturing PMI drew closer to 50 (50.9 from 52.6) and new orders fell to their lowest level in five years. The saving grace was that the services PMI rose to 53.3 from 52.1. France's manufacturing hit 47.3, a five-year low, and at 47.6, the service PMI appears to be at record lows. Separately, Germany's IFO was considerably weaker than expected. The headline fell to 97.5 from 101.3 and a consensus forecast of 100.1. The current assessment fell to 105.7 from 108.3. The market had expected a decline to 106.5.
Italian and French business confidence measures also slumped, and Spain reported a jump in unemployment to 10.4% in the second quarter, a three-year high.
U.K. economic news was also disappointing. June retail sales cratered 3.9%. The market had expected some payback for the outsized 3.5% rise in May (revised to 3.6%), but the consensus had expected "only" a 2.6% decline. This means that the year-over-year pace is 2.2%, half of what the market expected and down from a revised 7.9% reading in May.
Over the past five sessions, as the U.S. dollar has gained against all the G-10 currencies, sterling has outperformed, slipping only 0.6% (at $1.986) compared with a 1% decline in the euro and 1.45% loss of the Swiss franc and 0.85% decline in the yen. Today, it is playing a bit of catch-up, as stops were triggered on the break of the $1.9900 level, which has held like a rock in recent sessions. Cable, or sterling against the dollar, tested a trend line drawn off the mid-June low and early-July lows. It comes in near $1.9830. A retracement objective came in near $1.9845. While the euro has tested its 100-day moving average, sterling's 100-day moving average is not found until $1.9908.
Japan had bad news of its own. For the first time in more than four years, Japan's exports fell. In the recent past, the decline in exports to the U.S. had been offset by increased exports to Europe and Asia, but this ceased to be the case. Exports to the U.S. fell for the 10th consecutive month (-15.4%), while exports to Europe fell for the second consecutive month (-11.2%). Exports to Asia rose, but the 1.5% increase is among the weakest over the past several years. The pace of growth of exports to China slowed from 12.2% to 5.1%. The weakness of exports revealed in today's report increases the likelihood that Japan, like Germany, probably contracted in the second quarter.
Next week, the U.S. reports second-quarter GDP, and rather than slow from last year, the U.S. economy likely accelerated. Of course, with the inventory overhang still depressing housing, the credit crisis, and the energy and food price shock, the economy is expanding below trend, but it will offer a stark contrast to the slowing that is spreading and deepening in Japan and Europe.
The flexibility of U.S. fiscal and monetary policy also offers stark contrast with Japan's and Europe's approach. I expect this to lend the dollar support directly and through the interest rate expectation function. As a general principle, I continue to advise medium- and long-term investors to take advantage of dollar pullback to buy European currency rallies to lighten up or raise hedge ratios.
Marc Chandler has been covering the global capital markets in one fashion or another for nearly 20 years, working at economic consulting firms and global investment banks. Currently, he is the chief foreign exchange strategist at Brown Brothers Harriman. Recently, Chandler was the chief currency strategist for HSBC Bank USA. He is a prolific writer and speaker and appears regularly on CNBC. In addition to being quoted in the financial press, Chandler is often a guest writer for the Financial Times. He also teaches at New York University, where he is an associate professor in the School of Continuing and Professional Studies. While Chandler cannot provide investment advice or recommendations, he appreciates your feedback;
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