Cross Currents Produce Mixed Dollar

There are conflicting forces that have pushed the euro to new lows for the week, while sterling is trading at new highs for the week, bolstered by a much stronger than expected retail sales(1.7% vs. 0.5% consensus). The greenback slipped to its lowest level against the yen since last week's FOMC meeting but has resurfaced above the JPY102 level in the European morning.

It is the dollar-bloc that remains the most impressive. A larger than expected trade surplus (NZD$818 mln vs. NZD$600 mln consensus) lifted the New Zealand dollar to new highs since 2011 Since moving above its 200-day moving average on Tuesday, the Aussie has not looked back.

Today could be the first full session the Aussie holds above $0.9200 since last November. Meanwhile, as widely anticipated Norway's central bank left rates on hold, and although it cut this year's GDP forecast to 1.75% from 2.0%, it reaffirmed its commitment to hike rates next year.

ECB officials may play down the risk of deflation, but the market remains unconvinced. Today's money supply growth and lending data give no reason to expect this to change anytime soon. Money supply growth itself rose 1.3% in February from a year ago, and although this is an improvement over 1.2% in January, it is too little monetary fuel for a sustained recovery. There was also another drop in lending (-2.2%)to the private sector; this is to say, the transmission mechanism is still broken.
  

On Monday, the euro area will report as flash CPI report for March. February's final was 0.7%. Due to the base effect (CPI rose 1.2% last March), the risk is on the downside, and if anything, more so after today's money supply data. The fact that core inflation in February was 1.0%, suggest attempts to dismiss deflation fears because of what could be a transitory decline in energy and food appears disingenuous.

The UK retail sales may not be as good as the optics suggest.  Food sales account for roughly half of the month's 1.7% increase.   Spending on household goods actually fell 1.1%.   ONS noted that the poor weather (wettest winter for more than two centuries) had no material impact.   Short-end UK rates ticked, but the real reaction to the data was with sterling, which ran up three-quarters of a cent to $1.6640, to trade above the 20-day moving average (~$1.6620) for the first time in two weeks.  It is testing a band of resistance that extends toward $1.6660.   We expect this area to hold today. 

The euro was turned back from GBP0.8400 last week and again at the start of this week.  It is now pushing below GBP0.8280, seemingly headed for a test on GBP0.8200.   However, on the day, losses below GBP0.8250 may not be sustained.  The intra-day technical readings of over-stretched.

Investors continue to keep a watchful eye on Chinese developments.  The dollar traded in its narrowest range of the week against the yuan though it is still firmer, just above CNY6.21.  The focus instead seemed to shift to the money market, where the PBOC drained again, bringing this week's withdrawal to CNY98 bln, which Bloomberg data shows as the largest such operation in a month.  The 7-day repo rate rose for the eleventh session, the longest streak in seven years.  The jump in money market rates likely weighed on Chinese shares (Shanghai Composite -0.8%).

The US calendar looks full, but it is really not.  Revisions to Q4 GDP may be interesting (2.7% vs. 2.4%)  for economists, but too historic for traders.  Weekly initial jobless claims are overshadowed by next week's payroll figures.  Note that continued claims fell about 9k between survey periods.  February's pending home sales are expected to have risen 0.2%.  Pending home sales have been declining since last April (peaked 12.9%)  and have been negative since October.  Today's report could show the first stabilization.  However, the length of the decline suggest that something more than weather is the culprit.