Dollar Pacified By Weak Manufacturing Print And The Start Of Paulson-China Dialogue

The dollar was little moved through all the Tuesday market sessions as traders bide their time until week end indicators finally light up the wires. Until then, the market was taking in the few lowly economic indicators the docket had to offer and waiting for a progress report for the first day of the US-China meeting.

The EURUSD carried over yesterday?s technical levels, keeping the pair near one-month lows around 1.3435. Taking a break after its own, steep dollar rally, USDCHF has ranged in a 40-point band below 1.2330 for the past 24 hours. Even the carry trade - which flourishes when there is little event risk to rock the boat - was yielding to the directionless US dollar. The biggest move USDJPY could muster overnight was 35-point downswing that was quickly brought back into tight congestion just south of 121.60. Finally, GBPUSD broke rank as the pound steadily rose 60 points against the greenback after skipping across the 1.97 level.
Though the FX market was even less active than yesterday, the economic calendar was actually more active today. And, while this morning?s data has not satiated the constant demand for volatility here and now, the numbers have certainly modified the outlook for activity of two of the more important sectors of the economy: manufacturing and retail. The ‘headline? report this morning was the Richmond Fed survey for May. The gauge of factory activity in the mid-Atlantic region disappointed those aligning their projections to the official consensus. A modest improvement to a negative 10 print still fell short of the pick up to negative 6 economists had expected. Overall, this indicator was right in line with the modest improvements recorded in the Empire and Philly Fed survey?s before it. However, a breakdown was not so optimistic. Many of the components are still struggling in negative territory while the sub-gauge for new order volume marked a low not seen since August of 2003. With a rebound in the sector expected to follow the burn off in inventories, weak demand would present a totally different problem.
Elsewhere on the calendar, the weekly sales numbers were showing very different results for the same period. The ICSC-UBS Chain Store Sales indicator reported a 1.5 percent drop in sales through the week ending on May 19th. Accompanying the usual data, the group conducted another survey to see how many consumers would cut back on their discretionary spending because of high gasoline prices. According to the results, the percentage of American?s tempering their spending habits due to fuel costs was the highest since October 2005. Alternatively, the Redbook reported a 2.2 percent increase for the week of May 19th from a year before. This was only a modest pull-back from the one-year high set the previous period. Interest in discretionary spending will only intensify as time goes on as long as gasoline prices continue to set record highs.
Outside of the tidy confines of the economic calendar, the two-day Strategic Economic Dialogue will present ongoing event risk for the currency market. Before going behind locked doors with Chinese Vice Premier Yi Wu and his team of trade negotiators, US Treasury Henry Paulson issued a prepared statement to the press. In an effort to bring the public around to his side (opposing the Congressional lean towards tariffs and protectionist legislation), Paulson said Americans are not afraid of competition and the disagreement between the two countries was not about the direction of change but of the pace. This was the same sentiment he expressed in an earlier interview in which he made reference to the recent easing of the USDCNY trade band, which he said was helpful but still not enough.
Investors in the equities markets were already looking forward to the extended Memorial Day weekend. By 15:05 GMT, the S&P 500 was the biggest mover with a slight 0.07 percent decline to 1,524.03. Both the NASDAQ Composite and the Dow Jones Industrial Average were working on marginal gains to 2,479.30 and 13,543.04 respectively. Though the overall market was calm, there were still a number of individual movers that kept active traders on the move. Entertainment and casino firm MGM Mirage was reportedly in talks with Kirk Kerkorian?s Tracinda Corp to sell two of its key assets in Las Vegas. Interest from the well-known investor sent MGM shares rallying $17.63 or 28 percent higher to $80.58. From high entertainment to organic foods, Whole Foods Markets extended its $565 million offer for Wild Oats from today to June 20th. Whole Foods shares rose 1.3 percent to $40.38 on the news.
Like the dollar and US stocks, government yields saw little action on the fundamentally light session. The benchmark 10-year note was trading 3/32nds lower at 97-22 as its yield picked up a basis point to 4.794. The 30-year bond was just as inactive with its 4/32nds dip to 96-31 lifting the yield up a single basis point to 4.945.