Dollar Mixed to Start the Week

Investors continue wrestling with the implications of last week's surprise rate cut by the Bank of Japan. . The yen is little changed against the dollar, near its 200-day moving average (~JPY121.50).  The euro moved from the upper end of its two-cent range last Thursday to the lower end on before the week.  The absence of follow through selling appears to have prompted some short-covering.   The $1.0880-$1.09 area may stymie the upside.

Softer Chinese data and a pullback in oil prices are weighing on the dollar-bloc currencies.  The Canadian dollar is the weakest of the majors, losing a little more than 0.5%.    The Australian and New Zealand dollars are off a little more than a quarter of a cent.    The official Chinese manufacturing and service PMIs were weaker than expected at 49.4 and 53.5 respectively.   Ironically, the Caixin manufacturing PMI was stronger than expected, rising to 48.4 from 48.2.  The consensus had expected a small decline.

The onshore yuan still appears to have been re-pegged to the dollar, but is was the first session in seven that the PBOC set the fixing (central reference rate) slightly weaker for the yuan against the dollar.   The central bank continues to flood the banking system with liquidity ahead of the next week's extended holiday.  China's stocks continue to trade heavily, with the Shanghai Composite losing 1.8%.  However, the co-movement with other equity markets in the regions has slackened.  Not only did the Nikkei advance 2%, but Taiwan, Korea, Australia and Indonesian markets advanced today.    The MSCI Asia-Pacific Index rose 0.9%.

Oil prices are snapped a four-day advance.  The weekend press continued to cast doubts speculation that OPEC and Russia could reach an agreement to cut output.  A Bloomberg survey found expectations that the oil cartel increased output in January above and beyond what could be accounted for by Indonesia, who rejoined the OPEC. 

The eurozone manufacturing PMI showed no change from the flash 52.3 reading.   It matches the 12-month average, which is a little lower than the three and six-month averages (52.8 and 52.5 respectively).  Germany's was revised up to 52.3 from 52.1, but is still lower than December's 53.2, and is, in fact, the lowest since October.    France was unrevised to 50.0, which was down from 51.4 in December.

Spain surprised on the upside at 55.4, from 53.0 in December.  It defied expectations of a decline to 52.5.  Note the cyclical high was set last May at 55.8.   Italy disappointed.  The manufacturing PMI fell to 53.2 from 55.6.  A more modest decline (~54.8) had been expected.  It is the lowest since last September and snaps the momentum seen in Q4 15.

The UK pleasantly surprised the market.  Mortgage approvals rose in December, and the manufacturing PMI increased.  The UK PMI rose to 52.9 from an upwardly revised 52.1 reading in December (was initially 51.9).  Output rose to its best level in a year and a half, but exports were the poorest in seven months.

The US reports December personal income and spending.  These were embedded in the Q4 GDP released last week.  However, the monthly core PCE deflator may attract some attention.  It is expected to have finished the year at 1.4% (vs. 1.3% in November).  If it does, it would be the largest year-over-year rise of the entire year, though of course, still be the 2% target.  The manufacturing PMI/ISM are expected to be consistent with a stabilization of that sector.