Dollar Remains Heavy Despite News Stream

The US dollar remains heavy.  Its early gains in Asia following the S&P 2-step downgrade of Spain and a BOJ that announced an expansion of its balance sheet have been more than reversed by midday in Europe.  Sterling has completely shrugged off its unexpected contraction of Q1 GDP to trade at new multimonth highs today.  

The euro plunged through yesterday's lows--dropping a cent from the $1.3263 seen in Asia yesterday to briefly below $1.3160--before recovering back above levels seen late in NY yesterday.   The dollar is also lower against the yen, posting an outside down day--having traded above yesterday's high briefly only to break yesterday's lows and slipping to JPY80.50.  Even the Australian dollar, where the Reserve Bank of Australia is  preparing a 25, or possibly, but less likely 50 bp cut early next week, has set new two week highs. 

The US will report the first look at Q1 GDP.  Estimates appear to have firmed in recent days and the slowdown from the 3% pace seen in Q4 appears modest.  A figure now below 2.5% would be disappointing.  The more recent string of economic news warns of more moderation in the current quarter, but not enough to really rekindle speculation of QE3. 

The BOJ itself eased policy and the yen is not only stronger than the dollar, it is also stronger against the euro and sterling.  The BOJ expanded its asset purchase program by JPY10 trillion, while cutting the credit-loan program by JPY5 trillion, for a net JPY5 trillion increase in its balance sheet.  It also extended the asset purchase program by six months and the average maturities eligible under the program. 

While the reduction of the  credit loan program was surprising, the BOJ was more aggressive in that it expanded the purchases of risky assets like ETF and J-REITs, and minimizing its purchases of JGBs.  At the same time, today's action takes the BOJ out of play, joining the other major central banks, save the RBA, on the sidelines. 

Spanish sovereign yields have jumped in response to the S&P downgrade, but Spanish financial shares are up about 0.4% near midday.  Separately Spain also reported a string of disappointing data.  CPI rose 2.0% in April.  The market was looking for 1.8% and that means that no gain on Germany, which means no improvement in price competitiveness.  Real retail sales fell 3.9% year-over-year iin March from 3.6% in February.  Finally, the unemployment rate jumped to 24.44% in Q1 from 22.85% in Q4 11.   This was a somewhat larger rise than the consensus expected.  

Italy's bond auction went off with out a hitch.  Higher rates were paid, but not as much as the secondary market was indicating.  Bid-to-covers were lower, but the amount raised was near its maximum sought.  Italy reported a stronger than expected Feb retail sales growth of 0.6%.  The consensus called for a 0.2% contraction.  This follows a strong 1.1% rise in January. 

As well busy as the Italian consumer has been, they sidelined in France.  Consumer spending fell 2.9% in March compared.  The consensus called for a 1.9% decline.  This completely offset the rise in spending in February.  Although energy demand collapsed (-11.3%), it does seem to reflect a deeper than seasonal problem.  Unemployment has risen for nearly a year and is at its highest since late-1999. 

Lastly, I bring to your attention Mexico.  There is speculation that the central bank can deliver a 25 bp rate cut today.   While the relatively strong US economy has helped underpin Mexico's economy, the outright contraction in US manufacturing output in March warns that support may wane in the months ahead.   Initial dollar support is seen MXN13.12-MXN13.16.