Dollar Little Changed

The US dollar is mostly little changed against the European currencies as the North American session is about to begin.  Sterling has retained a firm bias after the risk of a new round of official gilt purchases (QE)was reduced.  It is holding above the $1.60 level and initially extended this week's rally off the successful test on $1.58 and reached its best level since mid-Nov '11 near $1.6080.  However, it is looking a bit stretched and a test of that $1.60 level in NY looks likely. 

The yen is the weakest of the majors.  The dollar held the JPY80 level earlier this week and extended its recovery gains.  The JPY81.80 area corresponds to a retracement objective of the dollar's slide from late March peak above JPY84 and to the 20-day moving average, which the dollar has not traded above since April 4.  

Japan reported a smaller than expected trade deficit in March (JPY82.6 bln vs JPY120 bln expectations).  Exports rose 1.2% in the month and 5.9% on a year-over-year basis.  Imports rose 10.5% year-over-year after a 9.2% increase in Feb.  What really stands out of the Japanese exports are to the US where they are up almost 24% on a year-over-year basis.  While there is the base effect from last year, but there is also the growth differentials that warn of further deterioration of the US trade balance. 

Spanish and French bond auctions went off without a hitch, or maybe with the help of the recent concessions built and while the euro seemed to record the highs of the day (~$1.3165) in response, the upticks were quickly sold into.  There are several aspects of the auctions that are important for investors.  It is not simply the amount that is being raised, but at what price and who is buying and with what enthusiasm. 

The recent IMF data that covers the period up through the end of Q3 '11 shows foreign investors reducing their share of Spanish bonds to 38% from a little over 50% in 2009 (and the foreign share of Italian debt has fallen from 42% to 37% in the same period).  

 Many market observers are concerned that Spanish banks are running out of funds to be used to purchase sovereign bonds.  Italian banks are generally perceived to have greater scope.   The ECB does not show much willingness to step into breach.  There are some reports suggesting that the ECB is pressuring Spain to find more savings, as it did to Italy last year. 

Separately, Italy reported a dramatic drop in industrial orders, warning that the government's cut in its GDP forecast yesterday may be prove insufficient.  Industrial orders fell 2.5% in February, which is more than twice the decline the market consensus expected.  Adding insult to injury, the January drop was revised to -7.7% from -7.4%. 

On a year-over-year basis, industrial orders are off a whopping 13.2%.  Domestic orders are off almost 19% compared with a year ago.   While industrial sales were up 2.3% in February, this merely recouped part of January's 4.9% decline. 

While the periphery of Europe remains problematic, we continue to warn about leakage into the core.  We had cautioned about what was happening in the Netherlands, where more austerity is "needed" despite the economic contraction and that it could topple the government.  Fitch yesterday made issued a warning yesterday.  There is a self-imposed deadline of tomorrow for resolution. 

And of course, there is the first round of the French election Sunday.  It continues to look like a dead heat between Sarkozy and Hollande in the first round and polls still point to Hollande victory in the second round.  While many observers have emphasized the change that Hollande represents (and recall it took Mitterrand a couple of years to move back to the center), few seem to appreciate that there may very well be no return to the status quo ante even if Sarkozy wins. 

Lastly a word about the US economy.  Weekly initial jobless claims are stabilizing and without further improvement, one must grow a bit concerned about the national figures.  This week's report covers the period of the national survey as well.  Existing home sales are expect to be flat to softer.  There have been some reports that banks are not immediately selling foreclosed properties.  i suspect there is some downside risks to the Philly Fed survey.  It is one of the early reads into April. 

Essentially, what looks to have happened is that production outstripped demand in Q1 and this led to 1) some what stronger growth than I initially anticipated --maybe 2.25%-2.5% rather than 2%--but the build up in inventories will be run off in Q2 with a trimming of production.  We saw that with the decline of manufacturing output in March, contained in the industrial production report earlier this week.