Dollar Mostly Firmer, But Euro Recovers, Yuan Tumbles

The US dollar is firmer to start the week against most of the major currencies. The euro zone reported less deflation than expected, and Germany and Italy reported better manufacturing PMIs. This helped the euro recover from the initial slide in Asia that had taken it down to $1.1160.   Disappointing capex figures from Japan coupled with US 10-year yields firming back above 2.0%, helped lift the dollar toward JPY120, but offers there capped a stronger advance. Modest corrective pressure against the euro appeared to limit sterling’s reaction to the stronger than expected manufacturing PMI. It has been largely limited to Friday’s trading range against the dollar.  

The Chinese rate cut over the weekend helped lift dollar against the yuan to around CNY6.2780, its highest level since 2012.  It did not have a positive knock-on effect on the dollar-bloc currencies or emerging market currencies, though it helped lift small cap stocks in China (Shenzhen Composite gained 2% while the Shanghai Composite rose 0.8%).  

Japan’s Q4 capex rose 2.8%, while the consensus was for a 4.0% increase after 5.5% in Q3. Profits rose 11.6% after a 7.6% gain in Q3, on the back of a 2.4% increase in sales (2.9% in Q3). Due to a a somewhat firmer than expected build in inventories (0.4%), there is risk that fourth quarter growth of 2.2% is revised up

At the end of last week, Germany, Italy and Spain reported less deflation or, in the former two cases, inflation instead of deflation. This was translated into a flash eurozone February CPI reading of a -0.33% from -0.61%. The core rate firmed to 0.62% from 0.57%. Unemployment fell to 11.2% in January from 11.3% in December (which was revised from 11.4%) 

The eurozone manufacturing PMI was in line with the flash reading of 51.0. However, the country breakdown was mixed. Germany stands at 51.1 from the 50.9 preliminary reading, but France ticked down to 47.6 from 47.7. Spain slipped to 54.2 from 54.7. The consensus had expected a 55.1 reading. Italy offered a pleasant surprise, with a 51.9 reading up from 49.9 in January.