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The euro has been sold back toward last week's low near $1.0520. The sell-off has come in two legs. The first in Asia took the euro through $1.0580. Then Europe took it down another half cent. The sell-off came despite a robust flash PMI. The Eurozone composite jumped to 56.0 from 54.4. The median guesstimate in the Bloomberg survey was for a little slippage to 54.3. The details were also favorable. The manufacturing PMI rose to 55.5 from 55.2. The median looked for a softer number. Economists expected an unchanged the service PMI. Instead, it jumped to 55.6 from 53.7. New orders reached a six-year high and prices charged rose to the highest level since July 2011.

Of note, the French composite rose above the German composite (56.2 vs. 56.1). Some observers try to draw a political implication from the recovery in the French economy. This may be mistaken. The two high income countries where the populist-nationalist agenda had electoral success, the UK and US, enjoyed among the strongest recoveries from the Great Financial Crisis, including levels of unemployment that were broadly regarded near full employment.

In addition to the eurozone PMI, the flash manufacturing PMI for Japan was reported. It rose to 53.5 from 52.7.  Markit reports its preliminary manufacturing, service, and composite PMI for the US today. Modest upticks are expected. The backdrop is that the US, Europe, and Japan are off to a firm start to the year. Equity markets seem to appreciate this. The MSCI Asia Pacific eked out a small gain, its fourth in the past five sessions. Of note, Korea's Kospi rose 0.95 to its best level since mid-2015. In Europe, the Dow Jones Stoxx 600 is up nearly 0.3%. It is the third consecutive gain and the tenth advance in 11 sessions.  Financials are the weakest sector in Europe, off about 0.7%, dragged in part by the disappointing earnings at HSBC. On the other hand, BHP Billiton and Anglo-American beat expectations. Iron ore future extended this year's rally, adding 3.2% to bring the year-to-date advance to 34%. Copper, zinc and lead prices also rallied.

Support for the euro is near $1.0520, which corresponds to the low from last week and the 61.8% retracement objective of last month's euro rally. Below there is potential toward $1.0450. The intraday technical are stretched.  A little short squeeze toward $1.0560 may give North American dealers a better selling opportunity. The dollar faces immediate resistance near JPY113.80, but a move above JPY114.10 is needed to suggest another run at JPY115.00. Sterling is flirting with the $1.2400 level. It has probed this shelf several times this month and has been unable to close below it.

The Australian dollar found initial support near $0.7650, a five-day low, but the $0.7670 area may cap corrective upticks. After the attempt on CAD1.30 failed in the middle of last week, the US dollar has recovered to CAD1.3160 in the European morning but has run out of steam. Recall that in the futures market, speculators are net long the dollar-bloc currencies and but net short the euro, sterling, yen and Swiss franc.

Marc Chandler
Global head of currency strategy at BBH
Brown Brothers Harriman

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