US Dollar Starts Important Week Mostly Stable to Higher

The US dollar is beginning what promises to be an important week on a
steady to firmer note against most of the major currencies.
It is a holiday in parts of Europe (e.g.,m Germany and Switzerland). 
Although excitement is not until Thursday’s ECB meeting, UK election, and the
testimony of former US FBI Director Comey, there are several developments today
to note.  

The most surprising of these events was the decision by a Saudi-led
coalition (Bahrain, UAE, and Egypt) to severe diplomatic and economic ties with
Qatar over its support for Iran and Islamist groups. 
Air and sea
travel have been suspended and Saudi
Arabia has closed its border.  Oil prices jumped on the news, but Brent’s
gains have been halvedQatar’s equities slid around 7.5%, and most regional
bourses were lower.

Qatar is a rich country and holds
stakes in a couple of European banks.
The US forward headquarters of its Middle East Central Command is also located in Qatar.  Japan and South
Korea accounted for nearly 50% of Qatar’s exports in 2015.  

In another surprise, in the largest state election in Mexico, the PRI’s
candidate Del Mazo appears to have won; turning back a challenge by the
populist-Left Morena’s candidate Gomez. 
   The peso has
appreciated 1.8%  in response, making it the strongest currency in the world
today.   The US dollar is holding a little above last month’s low
(~MXN18.2420), which itself was the lowest since the US election when the greenback traded as last as MXN18.1635.  It
has traded near MXN17.90 briefly last August.  

Sterling initially opened a little softer after the terrorist strike over
the weekend in London.
  However, it has been resilient, even in the
face of the poor service PMI (53.8 from 55.8), which returned to its lowest
level since February.   The composite PMI slumped to 54.4 from 56.2 in
April.  It averaged 54.6 in Q1, but Markit suggests that it is still
consistent with a rebound in the UK economy after 0.2% expansion in

Sterling is holding below its 20-day moving average (~$1.2920), which
it has not closed above since May 25. 
The opinion polls have generally tightened, but many investors still
appear confident that the Tories will hold on to a majority.  In the
options market, implied volatility remains firm,
and the premium for puts over calls is edging higher.  

China reported a rise in the Caixin services PMI.  It rose to 52.8
from 51.5.  It is the highest since January.  
The composite
PMI rose to 51.5 from 51.2.  It had averaged 52.3 in Q1 and 51.4 in
2016.  While shares in the region eked out a minor gain, Chinese stocks
were mostly lower, though shares in Shenzhen gained 0.7%, led by telecoms, energy, and materials.  Financials and
consumer staples were the only losing sectors.   The yuan appreciated
four weeks in a row coming into today.  The onshore yuan edged higher,
while the offshore yuan softened (for the third consecutive

The eurozone services PMI edged
higher from the flash reading primarily due to Germany.
  The Markit
services reading stands at 56.3 up from 56.2 in the preliminary estimate. 
It was 56.4 in April and averaged 55.1 in Q1.  The composite was unchanged
from the initial estimate of 56.8.  That matches the April reading and
compares with the Q1 average of 55.6  

The German services PMI was revised to 55.4 from the preliminary estimate
of 55.2.
  It was sufficient to lift the composite to 57.4 from
57.3.  This represents a new
cyclical high.  On the other hand,
the French services PMI was revised to
57.2 from the flash reading of
58.0.  It is disappointing but above the 56.0 average from Q1.  The
composite fell to 56.9 from 57.6 preliminary estimate, which is still a modest
improvement from the 56.6 reading in April.

Both Italy and Spain reports were disappointing.  Italian
services PMI fell to 55.1 from 56.2.  The composite also fell back  
(55.2 from 56.8), but both readings are still above Q1  and 2016
averages.  Spain’s PMI also softened.  The services PMI slipped to
57.3 from 57.8.  It is below its three-month average, but its above the 56.4 average from Q1.  The
composite slipped to 57.2 from 57.3.  It too remains elevated.  

The euro has been confined to about a quarter cent range so far today. 
It has drifted gently lower but has held
above $1.1260.   It had been trading closer to $1.1215 before the tepid US
jobs report before the weekend.  The dollar has been confined to about a 25 pip range on either side of
JPY110.50.  It has mostly held above JPY111.40.  A move above
JPY110.80-JPY111.00 will help stabilize the near-term technical tone.  The
dollar was trading near JPY111.50 before the US employment data.  

The US reports Markit and ISM service reports, factors and durable goods
for April.
  Non-farm productivity and unit labor costs are derived from the GDP report and the upward
revision to growth point to upward revision to productivity and downward
revision to unit labor costs.  The Fed’s new Labor Market Conditions Index
does not draw much attention.  It stood at 3.5 in April (3.6 in March). 
These are the strongest readings since May-June 2015.  It is expected to
have slipped to 3.0 in May.  


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