Dollar Stabilizes But Vulnerable Ahead of Manufacturing Data

Dollar and yen recover mildly as the week starts but strength is very weak. Markets are calming down from the boost from EU summit. But sentiments are still positive, in particular with expectation of more central bank easing to be announced later this week. BoE is expected to expand its asset purchase target by another GBP 50b while ECB is expected to cut rates by 25bps. While some said that ECB rate cut could be euro negative, we'd like to point out that the risk sentiments lifted by a cut from ECB, and overall market development, would be even more dollar and yen negative. That is, Euro should remain firm against dollar and yen in near term. As for today, a number of important economic data will be released, including PMI data from Swiss, Eurozone, UK and US. The UK manufacturing PMI will be important in determining the direction in EUR/GBP, which has been quite directionless recently. The US ISM manufacturing will have an impact on equities and commodity currencies.

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.

Released over the weekend, China's official PMI manufacturing dropped slightly from 50.4 to 50.2 in June, but was above expectation of 49.9. While that's the lowest figure in seven months, staying in expansionary region above 50 is psychologically helpful in easing worry of hard landing in China. Nonetheless, note that new export orders dropped sharply by -2.9 pts to 47.5 while new orders dropped to 49.2, both were in contraction. Separately, the HSBC manufacturing PMI was revised slightly up to 48.2. After all, the more important figure will be next week's Q2 GDP which should reflect more accurately how China's economy was hurt by the ongoing debt crisis in Europe.

SNB President Jordan reiterate and reaffirmed the central's stance to keeping the 1.2 floor in EUR/CHF. Jordan said that "as long as the enforcement of the minimum exchange rate remains the right monetary policy, we will pursue it with utmost determination". And SNB needs to "prevent a deflationary development". Jordan said that Swiss Franc is "still a very highly valued currency". And even though the balance sheet will expand as a consequence, SNB will have to "accept related risks" and bear.

While Spain won Euro 2012 by beating Italy 4-0, Spanish economy minister de Guindos warned yesterday that the country's economy will shrank further in Q2. And the government will continue to push structural reforms and austerities ahead. De Guindos said that the EU summit was a victory for the Euro and "from now on, we must all contribute". ECB executive board member Asmussen said that Greece must meet the austerity and reform targets by 100% to stay in Euro. Asmussen said Greece won't get more time to comply with the targets as "that means that the other 16 eurozone states and the IMF would then have to provide more financing." But all will have to be discussed and confirmed as troika arrives in Athens today to review the Greece's finances with the new government.