Dollar Trims Losses Ahead of the Weekend

The US dollar is firmer against most major and emerging market currencies to pare this week's decline.  There are three notable exceptions, and they are all in Asia.  For all practical purposes, the dollar is flat against the Japanese yen near JPY11.30.  

The South Korean won is up almost 1% to extend this week's pace-setting the gain to 2.65%.  The dollar has fallen 7.2% against the won since it peaked at the end of last month.  The Taiwanese dollar is 0.6% higher, which essentially doubles this week's gains. 

While the generally weaker dollar has been a factor, another driver has been the foreign equity purchases.  Today's gains are negligible; the MSCI Asia-Pacific Index is up 14.8% since mid-February.   Foreign investors have been significant buyers of Korean and Taiwanese shares.  Both have seen around $1.2 bln in foreign equity purchases this week.

This turned the balance in Korea so that this year foreigners have been small net buyers.  The turn for Taiwan came earlier.  Foreigners have purchased nearly $3.2 bln Taiwanese shares this year.  In comparison, foreign investors have sold $51 bln Japanese shares and $1.1 bln Indian shares this year.   

Comments by the ECB's Draghi and Praet may have encouraged consolidation in the euro ahead of the weekend.  While acknowledging limits to what monetary policy can achieve, the idea is that the ECB is prepared to do more if necessary.  The wire quotes suggest an attempt to soft the claim that policy rates have bottomed.  Recall it was that comment by Draghi during his press conference that turned euro (and other markets) around, sending it higher. 

Add a less aggressive trajectory of the Fed's dot plot and you have the euro testing the February high near $1.1375.  To be anything of note, the euro needs to fall back below $1.1235, and ideally $1.1200.   The US 2-year premium over Germany has fallen 10 bp this week to 1.32%. 

The dollar to its lowest level since Q4 14 against the yen yesterday (almost JPY110.65).  The market was nervous, and talk of rate checking and official concern provided the spur for the spike higher.  The dollar saw fresh selling near JPY112.00. This near-term cap needs to be overcome to lift the tone.  The dollar has largely held above JPY111.0 today.  The dollar remains vulnerable with softer US bond yields. 

Minutes from the BOJ meeting showed that the door to lower rates is still open.  Another rate cut is widely expected for next month.  Separately, the Cabinet Secretary Suga noted that the government is not considering postponing the sales tax that is supposed to be hiked April 2017 to 10% from 8%.  Recent reports have suggested that there is a push to delay the tax increase.  

Sterling was at $1.45 yesterday for the first time in a month.  It is consolidating in the upper end of yesterday's range.  A break of $1.44 could see $1.4330 as the initial retracement level.  Sterling third of a percent decline today cuts this week's gains in half and leaves it at the bottom of the major currencies this week. 

The dollar bloc currencies are consolidating their gains as well.  The market initially extended the Australian dollar’s gains to $0.7680 before pulling back.   The first retracement target is near $0.7580, and so far has held above $0.7600.  The US dollar has been confined to around 30 ticks on either side of CAD1.30.  Both the Australian and Canadian dollars can trade higher ahead of the weekend.

The University of Michigan’s consumer confidence report is important primarily for the inflation expectations measure that Fed officials have cited.  The long-term (5-10 year) inflation expectation matched the record low of 2.5% in February.  The market may have an asymmetrical response in that it is more likely to respond to a weaker report ( a new record low) than a higher report.  That said, the recent bounce in oil and gasoline prices may allow for a small increase.  

Canada reports both retail sales and CPI.  The January retail sales are expected to rise 0.6% after a 2.2% fall in December.  Consumer prices may have risen 0.4% in February, but due to the base effect, the year-over-year pace may slow to 1.5% from 2.0%.  The core rate is expected to be unchanged at 2.0%.  The government will deliver the new budget next week (March 22). 

Lastly, S&P will announce the conclusion of its review of Portuguese debt.  The rating agency, like Fitch and Moody’s, has taken away the country’s investment grade status.  S&P is unlikely to change its stance.   More importantly is the DBRS review for the end of next month.  It is the only ECB-recognized rating agency that still recognizes Portugal as investment grade.  If DBRS removes this, matching the judgment of the other main raters, Portuguese bonds would not longer qualify for official purchases under the current asset purchase program (without a waiver).  

Disclaimer