Dollar Comes Back Bid, but Still Vulnerable to Corrective Pressures

After softening ahead of the weekend, the US
dollar has begun the new week on a firm
  It is gaining against most major and emerging market
currencies.  Outside of what appears to be a staged call between US
President Elect Trump and the Taiwanese President, the developments in Europe
grabbed the markets’ attention.  Austria turned back the populist right Freedom Party’s bid for the
presidency. The Freedom Party does not appear to have carried any

In Italy, as the polls had consistently shown,
the referendum to reduce the size and power of the Senate was easily rejected.

Prime Minister Renzi has indicated plans to submit his resignation. 
Finance Minister Padoan, who canceled his plan to attend the EU finance
ministers’ meeting that begins today, is seen as a potential

Reforms for the lower chamber are pending
judicial review. 
Parliament elections are
for 2018.  It may comes sooner, but it is not
imminent.  Polls suggest that if an election were held today under the new
electoral rules, the 5-Star Movement would win in the second round.  At
the same time, polls suggest that there is not much appetite (about one in
seven) in Italy to leave the EMU.  That said, we are hesitant to see the
rejection of the referendum as part of an anti-establishment revolt.  For
sure, there was an element of that, but it does not do justice to the
widespread opposition included Monti, for example, and members of Renzi’s

The euro initially was marked down in early
Asia to almost $1.05.
  It recorded a new 20-month low.  By early
European turnover, the Europe had
returned to unchanged levels near $1.0665 before consolidating.  Italy’s
10-year yield is jumping nearly 10
bp.  From a week ago the yield is still off seven basis points.  The
two-year yield is flat, while German, French, and Spain’s two-year yields are a
basis point higher.  

Italy’s stock market is above 0.3% higher, a
laggard within Europe today
.  Italian bank shares are off 1.25% after
gaining almost 5.2% last week. Recall that Monte Paschi is in the middle of a five bln euro capital raising exercise.  
The Dow Jones Stoxx 600 is about 1% higher in late-morning dealings. 
Financials are matching the market’s performance.   

Italy is also the beneficiary of favorable
economic news.
  Last week, the manufacturing PMI rose to 52.2 from
50.9.  This is the best reading
since June.  Today the news was repeated with the services PMI.  It
rose to 53.3 from 51.0.  The Bloomberg median guesstimate was
51.6.   The composite rose to 53.4 from 51.1.  It is the best
since February.  

The eurozone
aggregate services PMI slipped to 53.8 from the 54.1 flash, but it is still an
impressive improvement from 52.8 in October.
  The November report is
the strongest of the year.  The composite also did not quite match the
flash reading, but at 53.9 it too is the best of the year.  The reason for
the softening from the flash is due to France.  The German flash report
was tweaked slightly higher in the final reading, but France was cut.  The service PMI was cut to 51.6 from 52.6.  This revised away most of the improvement from
the 51.4 reading in October. The composite was slashed to 51.4 from the 52.3
flash estimate.  It was 51.6 in October and is the lowest since
July.  Lastly, we note Spain’s report showed improvement over October and
both the services (55.1) and composite (55.2) were better than

The UK’s economic news was also favorable. 
The services PMI rose to 55.2 from 54.5.  The median guesstimate was a
small decline.  The composite rose to 55.2, as well, from a revised 54.7
(from 54.8). It is the highest since January.   Separately, the UK
reported a strong rise in auto sales (+2.9%).  We also note that the
Supreme Court begins hearing the government’s
appeal of the Constitutional Court ruling that Parliament authority is needed
to trigger Article 50. Meanwhile, the government’s position remains unclear as
Foreign Secretary Johnson declined to endorse others’ proposal that the UK
could pay for access to a single market.

In other developments, the Prime Minister of
New Zealand John Key unexpected resigned.
  He backed Finance Minister
English as his successor.  The New Zealand dollar is the weakest of the
major currencies, off about 0.85% against the US dollar.  Initial support is seen near $0.7050-$0.7060, with a break
signaling a retest on the $0.6970 area.  The opening of the Hong
Kong-Shenzhen link was lost in the down
move in equities.  The Shanghai Composite fell 1.2%, while Shenzhen
slipped 0.8%.  The MSCI Asian-Pacific Index was off 0.8%.  It is the
second consecutive session loss and the fourth in the past five.  

 After the November employment at the end
of last week, the US calendar turns
fairly light.
  Today features the ISM service PMI and the Fed’s new
Labor Market Conditions Index.   There are a few Fed speakers as
well.  Dudley and Evans speak in the North American morning, while Bullard
is set to discuss the US economy after European markets close the

The fact that neither the US employment data
nor the Italian referendum was able to sustain the euro’s losses warn of the
risk of upside pressure on the euro. 
A move above the pre-weekend
high, and especially a close above it (~$1.0690) would be favorable from a
technical point of view.  On the other hand, the dollar is already carving
out an outside up day against the Japanese yen.  It initially fell a
little beyond JPY112.90 and rebounded to JPY114.45 in the European morning. 
Last weeks high was near JPY114.85. 
Sterling lost a cent in Asia to almost $1.2625 before finding the bids that
drove it to nearly $1.2745 before consolidating in Europe.  The
dollar-bloc currencies are heavier but
are technically poised to recover in North American activity.  



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