Greenback Lacks Momentum, While Profit-Taking Weighs on Dollar-Bloc

Recent trends which include firmer equities and oil, weaker euro and bonds, and stronger dollar-bloc currencies are in reverse today, a turn-around Tuesday of sorts. MSCI's Emerging Market equity index is snapping a seven-day advancing streak, giving back yesterday's gains and a little more. However, Chinese shares managed to post small gains.

China reported a shocking 25.4% decline in February exports (year-over-year in dollar terms). This was a much larger drop than anyone expected. In January, exports fell 11.2%. Imports fared better, falling 13.8% after an 18.8% decline in January. Still, the drop was more than the 12% economists anticipated.

There are two things going on here. First, there are a few distortions, including the Lunar New Year and the impact of a drop in prices. Second, there is an actual slowdown in trade. This is what is happening globally as well. In value terms, world trade slowed last year. However, in volume terms, it grew slowly.

The consequence of the dramatic plunge in exports and the fall in imports is to nearly halve China's January trade surplus ($63.3 bln) to $32.6 bln. Economists and policymakers have argued that global imbalances are among the biggest threats to the world economy. The reduction of current account imbalances in a world of slow growth seems to necessitate less trade. It seems awkward to complain about the illness (imbalances) and then worry about the cure (less trade, more reliant on domestic input and demand).

There were two reports in Japan that caught investors' attention. First, Q4 15 GDP was revised to -1.1% at an annualized pace from -1.4%. We had anticipated further deterioration. Private investment and inventories were tweaked higher while consumption and public investment were adjusted lower.

Second, Japan reported a considerably smaller than expected current account surplus for January. The JPY520.8 bln surplus compares with JPY960.7 bln in December and expectations for JPY715 bln. The trade balance actually did not deteriorate as much as had been expected, falling to a JPY411.0 bln deficit rather than JPY530 bln the market anticipated.

The investment income surplus was less than expected. With the current account data, Japan reports portfolio flow details. The highlights include that China was a larger (~$17.4 bln) buyers of Japanese money market instruments, the most since 2005. Japanese investors were large sellers of UK gilts (the most since 2012) and US Treasuries (most in seven months) while buyers of French bonds (bonds since 2011).

The euro and sterling are struggling to sustain the recovery seen in the US yesterday. The focus is on Thursday's ECB meeting. Earlier today, Germany reported shockingly good industrial production data. Neither last week's factory orders data or the PMI gave investors any reason to expect a 3.3% month-over-month surge in German industrial output in January. Moreover, December's 1.2% slump was revised to only a 0.3% decline.

The January jump is the largest since 2009 and the first increase in three months. The details were good. Construction rose 7% , and capital goods production rose 5.3%. Manufacturing rose 3.2%. In contrast, Spain's industrial output slipped 0.1% in the month of January. Spanish economic activity was expected to moderate this year, and the concern is that the prolonged political stalemate may exacerbate the slowdown.

The euro fell from $1.1375 on February 11 to $1.0825 in the middle of last week. The $1.08 area marked the lower end of the previous trading range. Given the uncertainties about what the ECB will do and the impact of its actions, some position squaring made senses from a technical and fundamental vantage point. That bounce appears to run out of steam in front of the 20-day moving average seen a little below $1.1060.

Switzerland reported a pleasant surprise. February consumer prices rose 0.2%. The consensus was for a 0.1% decline. The year-over-year rate moderated to -0.8% from -13%, or on the EU-harmonized measure it stands at -0.9% rather than -1.5%. At the same time, seasonally adjusted unemployment was steady at 3.4%. Despite the lingering deflation, Swiss economic activity is expected to improve this year.

Sterling is trading heavier after briefly poking through $1.4280 yesterday. Support is seen in the $1.4140-$1.4180 band. The BOE may not take a stance on Brexit, but it is clear that the mere fact of the referendum is complicating its task. Late yesterday it announced that there were be three extra liquidity provisions before the referendum.

Governor Carney has also argued before Parliament that a strong EMU, with fiscal transfers, is in the UK's interest. The IMF will also issue a report on Brexit in a couple of months, but it is clear that it considers a destabilizing threat. At the same time, the issue appears to have taken on an "elite vs. people" dimensions, according to some reports, suggesting that the BOE and IMF's views may not sway the decision.

Emerging markets are also subject to some profit-taking today. A larger than expected current account deficit has sent the South African rand off 1.2%. The Indonesian rupiah's advancing streak has been stopped at 13 sessions. The weakness in Chinese trade figures appeared to have taken a toll on the Asian currencies more generally. Malaysia and South Korean central banks meet over the next two day but are expected to keep policy steady.