Calm before the Storm?

The US dollar is narrowly mixed, largely within its well-worn trading ranges against the major currencies with two exceptions. First, the dollar is trading at its best level against the Japanese since last January. It seems that the combination of Japan’s retail sales tax hike, easing of tensions in both Turkey and Russia, and the firm US data and higher US Treasury yields have lifted the dollar to near JPY104.

Second, the New Zealand dollar is off nearly 0.7%, after staging a key reversal yesterday, whereby it made new highs for the year and then sold off to finish below the previous day’s low. There has been follow through selling today. For the first time since late-February, it is testing its 20-day moving average (~$0.8560). A break of the $0.8530 area would suggest a top of some import could be in place after a nearly 6.5 cent rally in Q1. An index of prices of its main exports fell for the first time in five months, and Fonterra’s milk prices posted their biggest decline in 20 months (almost 9%), and it is the fourth consecutive weekly decline.

There have been several marginal developments over the 24 hours that are shaping the investment climate. First, there have been two positive developments. Late yesterday, German federal government workers agreed to a 5.4% pay increase over two years, beginning last month. Roughly 2.1 mln workers are directly affected, but the agreement may help set the tone for private sector negotiations. The wage increase important because it is greater than the pace of inflation and will help lean against deflationary (or disinflationary) forces. This is turn is significant as somewhat higher German inflation (without getting carried away), eases the burden of what other countries (periphery) has to do to restore competitiveness.

The US reported a sharp jump in auto sales. The annual unit pace jumped to 16.33 mln from 15.27 mln in February. Blaming the weather may or may not have been an overused excuse to explain economic weakness, but it did seem to depress auto sales. This in turn bodes well for retail sales. It also suggests that the rise in auto inventories may not be the problem they appeared. Of note, US producers garnered roughly 80% of the March increase.

There have been a couple less constructive developments. Japan’s Tankan survey contained a question about inflation expectations for the first time. Excluding the retail sales tax, the consensus was for a 1.5% increase in CPI this year and 1.7% on a 3- and 5-year basis. The importance of this is below the BOJ 2% target. This suggests another source of pressure for the BOJ to do more. On the other hand, the monetary base for March, released earlier today, suggests that this target is achievable. The monetary base stood at almost JPY220 trillion. The year-end target is JPY270 trillion.

There is more head shaking over indications from the French government that it will seek additional leeway on its fiscal goals this year; that the demands of austerity threaten to snip the recovery in the bud. Yes, therein lies the rub. Of course, other countries have made similar arguments, largely in vain. France was given two more years last summer to get its deficit below 3%. It overshot last year’s budget deficit target and unless there is remedial action, it will overshoot this year’s as well. This is likely to force a confrontation with the EC and, perhaps more behind the scenes, with Germany, who did not want to give France (and Spain) the extra grace period to begin with.

The ECB meets tomorrow and the vice president (Constancio) made an interesting comment yesterday that reinforces the expectation that the ECB is unlikely to take fresh initiatives at the meeting. Constancio played down the low (0.5%) CPI print, suggesting that April will see a recovery. This plays up the Easter-effect. We suspect there will be a significant euro move tomorrow. The failure of the act could trigger another wave of euro buying; similar to last month. A break of $1.40 would likely trigger stop loss buying.

On the other hand, the ECB does not ease, the market could ease for them by taking the euro lower. The resilience of the euro, and the deep held belief that the first Fed hike is still more than a year away (and the world is still awash with liquidity) we are more inclined to the former than the latter.

The North American session features the ADP employment estimate. The consensus is for 195k. In six of the past eight months, the ADP estimate has been on the high side of the initial private sector jobs report. The Bloomberg consensus is for a 200k increase in private sector payrolls, which would be the highest since last November. The estimate appears to have crept up in recent days. Separately, two non-voting Fed officials speak today, Lacker and Bullard. Both are among the hawkish wing.