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Summary

  • Holiday in London and Tokyo.
  • The Swedish krona is the softest major following poor data.
  • Ukrainian situation deteriorating.
  • The euro remains resilient in tight ranges just below $1.39.

The holidays in Tokyo and London ensure that the week's activity got off to a slow start. The major currencies are little changed. The yen is the strongest as the dollar slips below JPY102. Ukrainian events and the softness in US 10-year yields appear to be the main drags.

The Swedish krona is the weakest of the majors. It has been hobbled by extremely soft industrial production and orders data that means economic activity by itself might not end deflation and that easier monetary policy may still be needed.

There were two developments in Asia-Pacific to note. First, HSBC's final China manufacturing PMI was disappointing at 48.1 from 48.3 flash. Weakness was broad based, including output, new orders and export orders. Later this week, China is expected to report that exports fell in April on a year-over-year basis for the third consecutive month for the first time since 2009. Part of this may be reflected in the crackdown on fraudulent exports to hide capital inflows, but part of this appears to be a broader development.

Second, Australian building approvals unexpectedly fell 3.5% in March. The Bloomberg consensus called for a 1.5% increase. This was on top of the downward revision in the February series to -5.4% from -5.0%. The year-over-year gains of 20% are still impressive and will not change anyone's views for this week's RBA meeting.

Its growth forecasts may be tweaked higher as export volumes, and household consumption has been resilient. At the same time, the RBA's rhetoric against the Australian dollar strength may be raised a notch. That said, if the market is clamoring for action to back up words in the euro area, surely the same applies to the RBA.

There are two main news items from Europe today as well: Portugal's formal decision to exit its aid program without a safety net or standby facility, and the EU's new macroeconomic forecasts. Dipping below 3.6%, Portugal's 10-year bond yield is at new multi-year lows today. Portugal's assistance program ends on May 17.

At the end of the week, S&P and Moody's will announce the results of their review of Portugal's credit rating and outlook. S&P is likely to raise the outlook of its BB rating to at least stable, and maybe positive, from negative. Moody's could lift its Ba3 rating, but a positive outlook instead of stable is the safer call.

The European Commission shaved its growth and inflation forecasts for the euro area. Next year's GDP is expected to increase 1.7% rather than 1.8%, which it had forecast three months ago. Inflation this year is now expected to be at 0.8% rather than 1.0% and 1.2% in 2015 rather than 1.3%. The ECB's staff will update its forecasts next month. Separately, the Sentix investor confidence survey was out. The market had expected a small uptick from 14.1 in April, but instead it slipped back to 12.8. For its part, the euro remains steady in less than a quarter cent range thus far today at the upper end of last week's range, just below $1.3900.

We do not put much stock in the French Prime Minister's call for a weaker euro. The market sees this as "dog bites man" story. French officials are on the record of trying to talk the euro down. But so are other euro area officials and we might see that again this week at Draghi's press conference. The combination of the large and growing current account surplus and the portfolio and direct investment inflows (real and anticipated) underpin the currency. At the same time, most observers do not expect the ECB to move this week. June is widely regarded as the most likely time-frame.

The situation in eastern Ukraine is meanwhile deteriorating quickly. Ukraine's largest bank has "temporarily" closed its branches in the east. The US and Europe have been thus far reluctant to step up weapon sales to the Ukrainian government, and it is not clear that the events in east Ukraine are going to change this. The May 25 presidential election is now key.

Russia does not want Ukraine to hold the election, while the US and Germany have threatened additional sanction if the election is interrupted. Hopes that the election could be the start of the stabilization process seem naive as the election itself is part of the conflict and the results are unlikely to be recognized by Russia.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

Source: Yen Leads Despite Tokyo Holidays On Ukraine And Soft U.S. Bond Yields