NEW YORK ( BBH FX Strategy) -- The U.S. dollar is marginally softer as North American players return to their posts.The better-than-expected official Chinese manufacturing purchasing managers' index (53.1 from 51.0 in February and consensus for 50.5) saw steeper losses in the greenback. The disappointing eurozone manufacturing PMI however (47.7 same as the flash but weak details) helped cap the euro in front of last week's highs, ahead of 1.34, and weighed on European equities. The UK Chartered Institute of Purchasing and Supply survey of manufacturing surprised on the upside (52.1 vs 50.7 consensus) and sterling extended recent gains, though we suspect it will struggle to extend those gains in North America Monday.
We note another budding problem in the eurozone. We have commented previously on the diverging collateral rules within the eurozone and noted last week that the Bundesbank has decided not to accept debt from countries receiving aid as collateral. It appears poised to extend this further in May. Moody's noted earlier Monday that this has negative credit implications. At the same time, S&P reminded that it has 14 of 17 eurozone members on negative watch and one on selective default. The Bank of Japan is likely to come under more pressure to ease policy as early as next week's meeting. While stepping up its asset purchase program is one option, we suspect the BOJ could increase its fund provisioning measures to stimulate business sentiment instead. The dollar spiked to JPY83.30 in response to the disappointing Tankan, but has since retreated and is may retest the bottom of its two-week trading range around JPY82.00. For its part, the euro has tested the $1.34 area several times and remains in a sideways pattern near term. Of note, the three-month implied volatility is near its lowest level since August 2008. Implied volatility has come off as the euro recovered in the first quarter. We suspect the decline in volatility is like a coiled spring, warning of the increasing risk of a large spot move in the offing. Sterling is trying to establish a beachhead above $1.60 and if successful, would signal near-term potential toward $1.62. There is a U.S. economic report every day this week. The key reports are the auto sales and the employment report. We expect some moderation in both. February auto sales were at a four-year high and, with rising gasoline prices, we suspect the risk is for a pullback from the 15.03 mln unit pace. Nonfarm payrolls are also likely to have moderated. During the March survey week, there was little improvement in the weekly jobless claims compared with the February survey week. In addition, the warmer winter meant fewer layoffs and the payback should mean less hiring in the spring.