Dollar Pares Gains Ahead of the Weekend

The US dollar is trading lower against all
the major currencies today, which pares its earlier gains.
 The greenback is holding on to small gains
for the week against most of them, except the New Zealand dollar, Swiss franc
and Norwegian krone.  
After a quiet week for data,
the flash manufacturing PMI for Japan and the flash PMIs for the eurozone filled
the vacuum, with little impact on the
capital markets. 
 The takeaway from the PMIs is that
as Q2 came to close, economic momentum was flagging.  Meanwhile, the
immediate doubts cast on the US Senate health care reform raised questions over
Trump Administration’s legislative agenda.  
Japan’s flash manufacturing
PMI slowed to 52.0 from 53.1 in May. 
is the lowest reading since last November
and represents twice the decline that was
expected.  Weaker output (52.1 vs. 54 in May) and a decline in new
orders to their lowest level in seven months were notable drags.  Still, the dollar remains within
this week’s ranges against the yen that were set
in the first two days of the week (~JPY110.75-JPY111.80).  We note there
is near $1 bln of options struck between
JPY111.30-JPY111.50 that are expiring today.  
The eurozone flash PMIs were reported.  Although activity is still at an elevated level, it
slowed and by more than expected in June.  The composite eased to a
five-month low of 55.7 from 56.8.  The median forecast was for 56.6.
 Manufacturing edged up to 57.3 from 57.0.  New orders rose (58.5
from 57.8), though new export orders softened and employment eased.
 Prices also decelerated (output prices 54.0 vs. 54.1, and input prices
58.3 vs. 62.0).   Services were the source of disappointment.  The
headline activity eased to 54.7 from 56.3.  Forward-looking new business fell to 54.6 from 55.1.
German manufacturing slowed
to a still lofty 59.3 from 59.5 in May.
  New orders rose, and at 61.5 is the
highest in more than six years.  Services slowed to 53.7 from 55.4.
 Together, this led to a drop in the composite to 56.1 from 57.4.
France’s manufacturing PMI
rose (55.0 from 53.8), but the decline in services (55.3 from 57.2) dragged the
composite to 55.3 from 56.9, which is a five-month low. 
 Separately, France revised up Q1 GDP to 0.5% from
0.4% to match the Q4 performance.   This
represents the strongest six-month pace for France since Q4 10-Q1 11.  
The flash eurozone PMI does not change the macro picture
 The September ECB meeting, with
updated staff forecasts, is seen as a likely venue for officials to announce
its intention to reduce its asset purchases, but extend them into the first
part of next year.  
Like the yen, the euro’s
range this week was set on Monday (~$1.1215) and Tuesday (~$1.1120). 
There are nearly 2.2 bln euro of options struck between
$1.1175 and $1.1200 that expire today.  The euro has not been above $1.12
since the start of the week.  In May and June, the euro has alternated
between advancing and declining weeks.  True to the pattern, last week it rose, and this week it fell.
In the US, politics is
eclipsed economics in the week after the FOMC hiked the Fed Funds target for
the third time since last November’s election and signaled its intention to
begin reducing the balance sheet “relatively soon,” which we take to
mean an announcement in September to start in October. 
 The Republicans won both special congressional
elections this week, which would seem to suggest that despite the President’s
low support rating, his base remains intact.  
The would seem to bode well
for the legislative agenda.
  However, the Senate is having
similar problems as the House of Representatives did in agreeing on health care
reform.  Specifically, the strategy of bypassing the opposition Democrats entirely does not leave the Republicans with much room for dissent.  The Republicans
can afford to lose no more than two votes, assuming no Democrats support it.
 A 50/50 vote would allow Vice President Pence to cast the
However, nearly immediately,
four Republican Senators expressed their disapproval,
and several others indicated intentions to submit amendments to the bill when
the vote is held, likely next week. 
Ahead of the vote, there will likely be a great deal of
shuttle diplomacy to trying to secure the votes. A defeat would be a
significant blow to the legislative agenda. The summer recess would be likely be shortened if not abandoned.  It would
also raise questions about key legislation that is needed in September to raise
the debt ceiling and grant new spending authorization as part of the new budget
for the fiscal year that begins October 1.  
Markit reports the flash
PMIs for the US today, and the government
reports existing home sales. 
 New home sales reported earlier this
was a bit stronger than expected (1.1%
vs. expectations for -0.4%).  Existing homes is a much larger market, of
course, and are expected to snap back after a
shockingly poor report in April (11.4% decline, the largest in two
years).  The median forecast from the Bloomberg survey is for a 3.7% rise.
 If this is borne out, the annual pace will
rise to 590k, which would put it back above its 12-month average.  March
saw the cyclical high near 640k, which was the highest since the financial
Three Fed officials speak
ahead of the weekend. 
 Governor Powell, who is very much
part of the centrists on the Board.  Bullard has proposed a new paradigm,
which sets him a bit apart.  His comments earlier this week suggest a
greater desire to begin reducing the balance sheet rather than hiking rates.
 Mester from Cleveland is seen more
with the Yellen, Fischer, Dudley bloc inclined to gradually hike rates to avoid
a more disruptive pace if it slips behind.    
Yesterday it was announced
that all 34 large US banks passed the stress test.  
Essentially the test was how this institution would cope with a severe
recession.  The results of the second part of the test, where it is
determined if the banks have a sufficient cushion to raise dividends and/or buy back shares.   The Trump
Administration has proposed changes to the stress tests and their frequency.
Canada reports May CPI.  The headline pace may slow due to the base effect,
but the risk is that the core ticks higher.  Following yesterday’s
stronger than expected retail sales report, any upside surprise today would
further fan ideas that the Bank of Canada could hike rates as early as the July
12 meeting.  The market appears to have discounted a little more than a
50% chance of a hike at that meeting.  The Canadian dollar is practically
flat in the week as yesterday’s recovery
recouped the week’s earlier losses.  Initial US dollar support is seen near
CAD1.3200 and then CAD1.3165.  

Lastly, we note today FTSE Russell implement its
annual rebalancing of its equity indices. 
 Over the past several years, it
spurred a large rise in trading volume, though the impact on prices may be
difficult to decipher.  


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