Dollar Mixed, Drivers Indeterminate, Sterling Focus

The US dollar is mixed, but sterling remains impressively resilient in the face of disappointing economic data.  It poked through the $1.6200 level but appears to be struggling to sustain a perch.  The yen is the strongest of the majors, but ahead of tomorrow's BOJ meeting that is widely expected to take additional easing steps, it may have limited upside in North America.  The dollar faltered yesterday, unable to test the JPY81.80 resistance area and was sold to almost JPY80.80, the lowest level since last Tuesday. 

The euro itself is little changed having rallied up through $1.3260 in late Asia.  However, it reversed completely in the European morning on some disappointing data, such as EMU sentiment index, bank earnings (Stantander and Deutsche) and news that another Irish union (ICTU) will campaign against the fiscal compact.    While some support may be seen in the $1.3160-80 area, better support is seen $1.3130-50. 

Our immediate reaction to the FOMC and Bernanke's press conference still seems to be fair.  There were some minor tweaks, but the signal was unchanged.  If condition deteriorate relative to its expectations, the Fed will act, otherwise it sticks to its late 2014 time frame.   Some who are claiming some signal change from Bernanke seem to be risking creating a narrative to explain a price action rather than an analysis FOMC statement and Bernanke's comments. 

Sterling's resilience remains a main feature in the foreign exchange market.  It shrugged off the disappointing news that the economy contracted in Q1 and today the April CBI distributive trades (retail sales) balance fell to -6 from 0 in March.  The consensus was for a -4 balance.   Barclays and BP earnings seem to be helping the FTSE outperform most the continental bourses. 

Sterling  made new highs since early Sept 2011 in late Asia.  Support is now seen near $1.6160.    The euro was sold into yesterday bounce above GBP0.8200 and appears headed to test the low from earlier in the week near GBP0.8144, which is the lowest since Aug 2010. 

The ironic thing about discussing sterling's resilience is that most often I am asked about why the euro is so resilient.  Some will venture that sterling is a safe haven.  If sterling is a safe haven one would expect an inverse or at least a weak relationship with risk assets.  To test the hypothesis, we looked at the correlation between the S&P 500 and sterling.  The 30- and 60-day (percent change) correlation are just below 0.48. 

Sterling's correlation to a perceived safe haven asset asset to gold also does not support safe haven claims about it.  The 60-day correlation is just above 0.23. 

We are still struck by sterling's high correlation with the euro.  The 30-day is near 0.79, which is the upper end of the range since the crisis began.  The 60-day correlation is about 0.72, which is also the upper end of its range as well. 

The antipodean currencies also strike me as resilient.  The RBA is widely expected to cut at least 25 bp next week and yet the Australian dollar has rallied more than a cent of the low seen two days ago after the softer than expected CPI data.  $1.0380-$1.4020 offers chart-based resistance.  The New Zealand central bank met, left rates on hold, but was very dovish, threating rate cuts or intervention if its currency strengthened.   I do not expect it to carry through with its threats any time soon.  After the Japanese yen, the New Zealand dollar is the strongest within the G10 today.