Dollar Jumped On Safe Haven Flow, Global And Eurozone Worries Persisted

The optimism from EU Summit faded quickly and sentiments had a 180 degrees turned last week. Spanish yield jumped back above 7%, indicating that markets were still in deep worry about the eurozone's situation despite all the announcements from European leaders. Triple shot actions from world central banks provided no support to market confidence as risk markets were sold off sharply. Steep decline was seen after release of worse than expected employment data in US. Commodity currencies followed stocks and weakened broadly against dollar and yen. Nonetheless, European majors were even weaker as EUR/AUD dived to new record low while EUR/USD dropped to lowest level in more than a year. The Dollar Index jumped sharply to close at 83.37 and is now looking at breaking the near-term resistance of 83.54 soon.

Global economic data released recent pointed to deeper slow down ahead. From US, NFP showed mere 80k job growth in June, comparing to expectation of 90k. The total figure for Q2 was 225k only, just at 1/3 of Q1's 677k. Also, Q2's figure was even less than half of Q4's 492k. Unemployment rate was unchanged at 8.2%. The US ISM manufacturing index unexpected dipped into contraction region at 49.7 in June. ISM services indices also disappointed by dipping to 52.1. Eurozone PMI manufacturing was at 44.6 in June. Services PMI was at 47.1, both in deep contraction. UK PMI manufacturing improved to 48.6 in June but stayed in contractionary region below 50. PMI services came in weaker than expected at 51.3. Canada Ivey PMI also dropped below 50 to 49 in June. China's official PMI manufacturing dropped 50.2 in June, lowest figure in seven months.

IMF managing director Lagarde said that the organization will cut global growth forecast this year and economic outlook will be "tilted to the downside." Though, Lagarde qualified the statement and said that "tilted means there's not an enormous variation" even though it's negative. In April, IMF projected 2012 global growth to be at 3.5%while 2013 growth was projected to be 4.1%. That was an upward revision from January's estimate of 3.3% in 2012 and 3.9% in 2013. But it's believed that recent development and economic data has prompted IMF to lower the forecast again.

Lagarde also pointed out that "if there was a further deterioration arising out of the eurozone, it might have an unwelcome currency effect on the yen, which would be used as a safe haven and therefore would become further overvalued." The rate cut from ECB and PBoC as well as BoE's asset purchase program expansion provided no support to market confidence. But rather, they're seen as sign of deep worry from central bankers.

ECB cut the benchmark interest rates to historical low of 0.75%. And more importantly, the deposit rate is now at 0.00%. Comments from ECB President Draghi was overwhelmingly cautious as his noted that "downside risks to the euro-area economic outlook have materialized" and the bank doesn't see "risks for inflationary expectations". Draghi warned that Q2 indicators pointed to a "renewed weakening of economic growth and heightened uncertainty". With deposit rates at zero, markets are already speculating that there could be another round of LTRO in September, and ECB could eventually adopt quantitative easing.

Also, a important development was that ECB said nothing, provided no hint on supporting the peripherals. There was no talk about using ESM to buy Spanish and Italian bonds. In addition, Finland and the Netherlands have openly expressed that they will block using ESM to buy government bonds in the secondary market. The stance was further reiterated by Finnish Finance Minister that the country "will not hang itself to the euro at any cost and we are prepared for all scenarios." She further added that "collective responsibility for other countries' debt, economics and risks; this is not what we should be prepared for." The EU summit was not last episode of the drama. This week's EcoFin meeting will be another chapter.

BoE left the benchmark interest rates unchanged at 0.5% today but expanded the asset purchase program by another GBP 50b to GBP 573b. BoE noted that business indicators showed "continuation of weakness" in the economy in near-term, "both at home and abroad." Also, the central bank remained concerned with the "indebtedness and competitiveness of several euro-area economies" which weighed down on confidence. Falling commodity prices should moderate external price pressure further from 2.8% yoy in May.

The quarterly Tankan survey from Japan showed that large companies in the countries were less pessimistic about the conditions. Q2 large manufacturers unexpectedly improved from -4 to -1 while non-manufacturing index rose more than expected from 5 to 8. Large manufacturers and non-manufacturers are expected to raise capex by 6.2% this year, exceeding market expectations. Outlook was also positive with large manufacturers expecting 10.1% rise in profit, comparing to 0.6% in March survey. Non-manufacturers expect profits to shrink -1.8%, comparing to -2.3% in March survey.

The data should ease some pressure from BoJ for imminent expansion on its easing program. Nonetheless, the manufacturing index is still in negative territory. There were concerns that further slowdown in Europe and China will continue to weigh on the manufacturing and export sectors of Japan. And while BoJ would continue to wait-and-see, adding stimulus is still the next step, also considering the stubborn strength in yen.

The RBA expectedly left the cash rate unchanged at 3.5% in June, following two consecutive cuts totaling 75 bps in May and June. Governor Glenn Stevens saw growth in the country during the inter-meeting period and anticipated inflation to be inline with the target. Notwithstanding uncertainty and potential downside risks in the global economy, the central bank believed the monetary stance is appropriate. In our opinion, the meeting statement indicated no bias on future policy rate outlook.

In China, PBoC cut the benchmark interest rates for the second time in a month. The one year yuan lending rate will be lowered by 31 bps to 6.00%. while one year deposit rate will be lowered by 25bps to 3.00%. Also, the PBoC said that banks are now allowed to offer 30% discount to borrowers, up from prior 20%. PBoC, nonetheless, urged banks to continue to "strictly implement the differentiated housing loans policy and continue to curb speculative home purchases."