Dollar Firms, But Pittance Thus Far

The greenback is generally firmer today, but still remains largely bouncing along its recent trough.  The best case for a more positive assessment is with the Australian dollar, which has now fallen through last week's low to trade at its lowest level since mid-Jan. 

European officials have been making all kinds of allusions to the worst of the crisis is over.  We demur.  We are concerned the first quarter was about absorbing the LTRO liquidity and the second quarter is going to see the crisis flare up again, with political factors increasing importance as well. 

The pressure on the periphery seems to be increasing.   An important tell today is the sell-off in Italian bonds despite successful auctions earlier.  Italian bonds have been trending lower and the premium over Germany widening since PM Monti touched the "third rail" of Italian political economy by pushing for changes in Article 18 that ossified the Italian labor market. 

Fitch said earlier that Portuguese banks were on shaky ground.  Moody's downgraded several.   Portuguese bonds are under some pressure, but not as much as Greece, Spain and Italy.  However, Portuguese bank shares are being hit.  The financials are off more than 2.5% while the main equity index is off about 1%.  

There is a general strike in Spain today ahead of tomorrow's 2012 budget unveiling that must deliver more austerity despite the economy shrinking, he unemployment rate approach 25% and property and house prices falling and bad loans rising.    Despite the LTROs the Spanish 10-year benchmark yield is 40 bp higher than it finished last year. 

The yen is the strongest of the major currencies today.  There are a few considerations.  There is talk of repatration ahead of the fiscal year end.  Partly related and partly a separate issue, there was unwinding of short yen long Australian dollar and euro positions.  A local journalist played up the chances of a RBA rate cut next week--rather than in May--and the weakness of the Chinese stock market and related economic concerns has taken its toll on the Aussie. 

Japan also reported a much better than expected retail sales figure.  Retail sales jumped 2% in February.  Economists had expected no increase.  The year-over-year rate that was at 1.9% in January jumped to 3.5%.  This is ahead of tomorrow's data that should show a continued recovery in industrial output, though deflation will be still be evident, and the Tankan Survey early Monday in Tokyo (Sunday evening ET).

European finance ministers meet Friday and Saturday.  There appear to be five main issues.  The one that has been in th enews most recently is the likely agreement to allow the EFSF (a guarantee program) and the ESM (actual financial commitment) to run concurrently for about a year and thereby strengthen the firewall.   Investors seem not to be overly impressed.  It still falls well shy of the shock and awe level. 

There are two personnel changes that may be decided. Juncker's term as Eurogroup head is almost over and it appears Germany's Schaeuble is his most likely successor.  The finance ministers may support Luxembourg central banker Mersch to replace Spain's Gonzalez-Paramo on the ECB Board.   As these things go, it may mean that down the road a Spaniard is named the head of the ESM. 

In addition, there may be a move to scrap plans to make firm rotate rating agencies that EU Financial Services Commission Barnier had proposed last year.  One inaction:  there is unlikely to be much progress on the financial transaction tax. 

Turning to US data.  The risk is an upside surprise today on Q4 '11 GDP revision.  It may come from increased household spending, especially services.