In Europe recession extends
The rate of employment descends
Their policy makers
Those movers and shakers
Cannot stop the current strong trends

It is all dollars, all the time if you are seeking an asset to buy.  The dollar is at its strongest level overall since July, 2010 having made new 4+ year highs against the yen overnight and 6 week highs vs. the euro.  The proximate cause of the euro’s weakness was consistently weaker than expected Eurozone GDP data, with Germany printing at 0.1%, France at -0.2%, Italy at -0.5%, all three lower than expected, and the EZ as a whole at -0.2%.  This makes 6 consecutive quarters of negative growth in the Eurozone, an ignominious new record.  While the market seems convinced that Draghi will act to cut rates again if things get worse, for the time being, the contrast between the US story, where data has seemed to have bottomed, and the European story, where things continue to sink, is quite sharp and the dollar remains the key beneficiary.

In the UK, the employment data was mixed, with a slightly lower claimant count and downtick in the Unemployment rate to 7.8% offset by weaker than expected earnings.  But more importantly, the BOE’s Inflation Report was released, with the Old Lady raising its GDP forecast for Q2 to 0.5%, and lowering its longer term inflation forecast, although with several caveats.  The pound’s response has been to trade somewhat lower, although on the day it has done very little.

Meanwhile, the yen has traded above 102.50 for the first time since October, 2008, and shows no signs of stopping.  Yesterday I expected a bit of consolidation given the strength of the move since breaking through 100, but the market has other ideas.  Overall, nothing has changed in my view that USDJPY will be at 110 come December.  If anything, I am probably being too conservative.  Japanese Consumer Confidence was a bit weaker than expected at 44.5, but the stories that are really getting coverage are those that discuss foreign investment by Japanese companies.  Last night, the focus was on the big Japanese banks, which are suffering because they can’t play the yield curve with the BOJ buying 70% of all JGB’s, and so are forced to find foreign acquisitions of assets to grow.  This is just another facet of the weak yen trade, and one that is likely to increase as time passes.

US data today brings PPI (exp -0.6%, 0.1% core); Empire Manufacturing (4.00); Capacity Utilization (78.3%) and IP (-0.2%).  Given the recent patterns of data, I expect that these numbers are likely to err on the high side, rather than be weak.  The other big story this morning has been the increase in tax revenues in the US.  Tax receipts through April have been almost $100 billion higher than expected, although that was likely the result of capital gains brought forward to 2012 given the impending change in tax rates.  However, for now, the Administration is pushing the numbers hard to show that their plans are working, and the data does look better.  Will it continue?  I guess it depends on how the US economy continues to perform.  Why does it matter?  This is one of the things that will underpin the dollar going forward, proof that the US economy is rebounding, so pay attention to this.

Looking at the commodity currencies, both have also continued to weaken in the face of the USD’s remarkable recent strength.  Aussie has tested key support at 0.9850, which thus far has held, but a break there will encourage a major technical response opening up an opportunity for a move to as low as 0.9350 before its all over.  Receivables hedgers beware!  CAD, on the other hand, has been weakening, but not quite so much as other currencies given its strong ties to the US.  An eventual move to 1.05 seems realistic, but I see limited opportunity for much beyond that.

With all the focus on the majors, the emerging market currencies are not getting much attention.  Frankly, I think that is an appropriate market response.  These will continue to follow the dollar’s overall lead unless something remarkable happens in a given emerging market.  So look for further USD strength here.

According to research by Pew
The nations inside the EU
Are starting to feel
The gist of the deal
Is not beneficial, who knew?

Today’s fight is over the banks
As Spain, France and It’ly close ranks
While Germans maintain
That they will abstain
Support for the others? No thanks

The euro is a bit softer this morning from yesterday’s close as the market reversed early gains in the wake of a much weaker than expected German ZEW Survey (released at 36.4, exp 40.0).  But the headlines in the papers are over the angst that is increasingly visible by the EU nations as they try to reconcile significant differences over how to deal with banking resolutions.  The sides remain the same, with Germany, Austria and the Netherlands insisting that a networked approach where each country deals with its own banking troubles is necessary and anything more than that would require Treaty changes.  Meanwhile, the bulk of the rest of Europe, notably France, Italy and Spain contend that if there is no common banking support agency, with participation by all nations, then it won’t work.  Of course this is the natural outcome given that the latter group is basically telling Germany that because they have the money, they have to pay, and the German’s are simply trying to hang onto their money.  I thought it quite interesting that the results of an annual Pew Research survey showed that belief that the EU has been a benefit to each nation has tumbled to well less than half the population, with some countries, like France down to 41% in favor (Greece is, not surprisingly, at 11% beneficial).  If the core population of the EU is not happy, just how long can they continue to support the single currency?  This is symptomatic of the underlying flaws in the euro that are likely to prevent significant strength any time soon.

As to the rest of the market, it has been a very unexciting day.  There has been little movement in the yen, and no news to drive things.  It seems to be consolidating its recent losses ahead of its next move.  I think 105 is in the cards for June, but for now, 100.50-102.50 is likely to contain us.

The pound is dull as well, with no data of note and only domestic policy discussions about banks and the potential EU referendum to keep business writers busy.

There was an article in the WSJ today about the AUDMXN cross, pointing out that many investors have been shorting AUD against the MXN all year as a proxy bet on the diverging economic outcomes of the US and China.  While early in the year it was certainly a great trade, and it has gained about 9% in value so far this year, my concern is that if the Journal is writing about it, the opportunity may well be ending.  Typically, when a trade idea hits the mainstream media, its run has ended.  While I do still like AUD lower, it is not clear to me that MXN will continue to show the strength as it has to date.

Finally, it seems that my brief discussion of Chinese data yesterday was on the mark, as a number of analysts have reduced their GDP targets for 2013, with the median estimate now 7.8%, down from 8.0% before.  Personally, I think we will have difficulty achieving that, and that the 7.5% level mentioned by Chinese Premier Li is more likely to be the end result.  With that in mind, I expect that we will see a slowdown in what had been a steady appreciation of the CNY as the rest of the year progresses.

Good luck

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In life, there comes often a time
When each man has his chance high to climb
If he passes it by
He’ll always wonder why
But if grabbed it can be so sublime

Well, today’s when the Fates smiled on me
They presented opportunity
I’d be foolish to pass
And so this is, alas
My final note for this payee

Come August I’m back in my seat
At a new bank, seems I can’t leave the Street
But between now and then
I will still use my pen
In my blog and occasional Tweet

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