USD Only Manages Shallow Recovery Against Euro, Yen

After the shellacking it took after the shockingly poor jobs data, the US dollar has only managed a shallow recovery against the euro and yen. The euro peaked near $1.1375 before the weekend. The mild pullback to almost $1.1335 drew some fresh buying.

The dollar made a marginal new low just below JPY106.40 in early Asia. It ticks to nearly JPY107.30 in late Asian turnover as the Nikkei climbed back after gapping lower and closed at session highs. The greenback would have to resurface above the JPY107.80-JPY108.10 to begin repairing the technical damage inflicted last week.

Sterling peaking near $1.4425 before the weekend. At least three polls showed those favoring Brexit were leading ahead of the June 23 referendum. Reports indicated that the bookmakers in London also narrowed the odds of a vote to leave the EU. Sterling slid to $1.4350, its lowest level since May 16, where it found support in Asia and again in early Europe. One-month volatility is quoted at 22% today, up from 17.1% a week ago. The put-call skew remains at near a record extreme (~6.6%).

The main economic news is from Germany today. April factory orders fell 2.0%, four times more than the Bloomberg median expected. The sting was only partly blunted by the upward revision in the March series to 2.6% from 1.9%. Domestic orders were the bright spot. They rose (1.3%) for a third consecutive month. Orders from the eurozone were also favorable with a 2.5% increase. The main drag was the 87.3% drop in orders from countries outside the euro area. Investment goods were especially hard hit, falling 13.3% (after 11% gain in March).

It is tempting to dismiss the Germany factory orders as payback in a volatile series. However, the report plays on fears that the slowing of the Chinese economy in particular, and emerging markets in general may be taking a tool and that the strong growth in Q1 (0.7% quarter-over-quarter) will not be repeated. In fact, before the weekend, the Bundesbank shaved its growth forecast for this year to 1.7% (vs. 1.8%) and 2017 to 1.4% from 1.7%.

The French central bank also shaved next year's growth to 1.5% from 1.6%. It anticipates 1.4% growth this year, which seems to be put at risk by the combination of floods and labor activity pushing against Prime Minister Valls reforms.

The Swiss people rejected both referendums in the weekend vote. First, the universal basic income was rejected by around a 75% majority. Second, the effort to make state-controlled companies non-for-profit failed by about a 2/3 majority. The Swiss franc is slightly firmer against the dollar and euro, though this may be related to Brexit fears.

The local elections, especially in the large cities, were inconclusive and a second round (June 19) is needed. However, the takeaway is that Prime Minister Renzi's center-left coalition is seeing its lead as the most popular party narrow. The results also point to the Five Star Movement ascending to be the second biggest political force. The Five Star Movement's candidate Raggi led in Rome's mayor race (~35%-25%). Similarly in Turin, the Movement candidate bested the PD candidate, though not by a sufficient margin to avoid a run-off.

It appears the PD candidate has a narrow lead in Milan, the only major city in which Berlusconi's Forza Italia joined forces with the far-right Northern League. In Naples, the PD candidate came in third place, meaning he will not qualify for the run-off contest in a fortnight.

While Asian bonds were pulled higher by the pre-weekend rally in the US, European bond yields are mostly firmer today. UK gilts are the exception, and are trading a touch firmer. Italian bonds are matching the four bp rise seen in Spanish bonds, while the core yields are up a bit less.

The PBOC fixed the yuan 0.5% stronger, but the market took the yuan lower. Against the basket, the yuan has made a new low for the year. China's shares fell for the first time in three sessions. Profit-taking was seen in the brokerage industry that was up 7% last week. The Asian markets seemed to have a looser link with China than was the case last summer or even at the start of the year. The MSCI Asia-Pacific Index rose for 0.25%. Most Asian currencies rose against the dollar, including the Indonesian rupiah (1.6%), the Malaysian ringgit (1.2%), and the Thai baht (1.0%).

The highlight of the North American session today is Fed Chair Yellen's speech in Philadelphia (12:30 ET). Recently she suggested a rate hike in the coming months would likely be appropriate. The key issue is whether the surprisingly poor jobs data has changed her mind. We doubt it. The magnitude of the miss and the lack of other data confirming it, in the past has often seen a sharp snap back in the next month. Nevertheless, the issue ahead of the next week's FOMC meeting is whether the dot plot, which was trimmed to 2 hikes in March from 4 in December, would be cut to a single hike.