FX Note from Singapore

The US dollar is narrowly mixed as the European session is getting under way.  Players appear to lack near-term conviction.  The euro is trying to recover from the breakdown at the end of last week, but needs to resurface above the $1.3210 area to blunt some of the negative bias.  The downside beckons.   The fact that the $1.56 level held in sterling warns that bottom pickers may emerge, but it may find it tough sledding if the the stabilization of the euro proves brief.    

There were some investment houses warning that the BOJ would increase its asset purchase plan at today's meeting.  One board member did, but he lost the vote 8-1.  The BOJ did throw a bone to those who wanted more action, even though it was only last month it surprised most observers by expanding its asset purchase program by JPY10 trillion and announcing an inflation goal. 

Today it extended a loan scheme targeting growth sector by JPY2 trillion to JPY5.5 trillion.  Yet of the increase half will be dollar denominated loans, drawing on its reserve holdings.  

The Nikkei came off on the news, but managed to eke out a small gain on the day.  Ironically telecom and consumer services were out performers, even though the tertiary index, which is an important read on the service sector, contracted by 1.7%, whereas the consensus had looked for a small increase.  It does appear that a change rules regarding deductibles lead to a sharp decline in life and casualty insurance (-6.7%), weighed on the overall index.  

The dollar held support near JPY81 and appears poised to move higher.  Note that the 2-year interest rate differential between the US and Japan continues to edge higher (wider) and now at 22 bp is the highest since last August. 

The Australian dollar ran out of steam near $1.0560 in Asia after falling to $1.0475 in the US yesterday, after the recent batch of Chinese data disappointed.   Sentiment toward the Aussie appears to be changing to a less favorable stance and the speculative market, judging from the futures data, is still quite long.  

There are three highlights for today's European and North American session.  In Europe, Germany's ZEW survey will be released.  It seems that it generally tracks the stock market and the DAX has been flat in February.  Although it is doing a bit better in recent days, the ZEW is expected to be largely flat as well.  

The highlights in the US are the February retail sales report and the FOMC meeting.  Given the strength of the auto sales and chain store sales reports, the consensus calls for a strong 1.1% headline increase.  There is upside risks to this report, which will also be inflated by higher gasoline prices.  Excluding auto and gasoline, a healthy 0.5-0.6% increase expected after a 0.6% increase in January.  The increased employment--best six months of job creation since 2006--easier credit, and saw draw down in savings appear to be fueling the shopping.  

The FOMC meeting maybe as close to a non-event as this event can be.  The nuances may therefore be more important.  For example, it may recognize the continued improvement in the labor market, even while acknowledging the unemployment rate remains abnormally high.  This recognition though could further undermine ideas that QE3 is around the corner.  

We have consistently argued that the bar to QE3 is high, requiring either threat of recession or deflation.  Neither seems likely now or on the horizon.   In terms of inflation the core PCE measure that the Fed favors has been creeping up.  The 3-month average through January (most recent data) shows a 1.85% increase, while the 12-month average is 1.52%.  

While Q4 11 GDP may still be revised higher, when the "final" estimate is published later this month (partly on the back of increased health care expenditures that were not picked up in prior estimates), the Fed is unlikely to  upgrade its economic assessment too much as Q1 is tracking a considerably slower pace--something between 2% and 2.25%.

Spain and the EU are looking for some common ground.  The EC relented and raised Spain's budget deficit target to 5.3% of  GDP up from 4.4% initially, but not quite the 5.8% Spain sought.  Indications from the finance ministry suggests this is acceptable to Spain and some additional savings will be delivered.    Spanish bonds are bid (though not as much as Italian bonds) ahead of today's auction.  

Lastly, the indicative pricing of Greece's new bonds gives further warning that investors are not convinced that the Greek drama is over.   The new bonds maturing in 2023-2042 have price indications of 15-30 cents on the euro.  Greece's 1-year yield finished yesterday at a 11.43%, which seems only understandable if one were to think that another default is likely in the next year.    The official sector holds the lion's share of Greek debt now so any further meaningful debt relief will have to come from the public sector, which is more loath to take a loss than the private sector.