Dollar Finishing Week on Firm Note

The US dollar is trading firmly.  The official verbal commentary this week by Europe's Juncker and Japan's Amari were more disruptive noise a true signal.  These mis-directional cues whipsawed short-term participants and served to obscure what was really happening.  

One of the most important take aways, it seems, from this week's action is the narrowing of the breadth of the dollar's decline.  It is really limited to only the euro, with itself appears to have stalled near $1.34.  Weighed down by a poor retail sales reports today (-0.1% vs consensus +0.2%, leaving the year-over-year rate at 0.3%, half of what was expected), sterling has broken the uptrend going back to last June's low near $1.5270.  There is immediate support near $.1.5900, the real target is the $1.5830 low from mid-Nov.   The $1.60 area, which had offered support is now resistance.

 

The dollar-bloc has generally not participated in the recent move against the dollar.   The Australian dollar is off half a cent today and making new lows from the week below $1.05.  Even the firm data from China, indicating that the world's second largest economy stopped slowing failed to lift the Aussie.   

The US dollar is also making new highs for the week against the Canadian dollar.  For the fourth day running the US dollar is setting higher lows and higher highs against the Loonie and is now flirting the CAD0.9900.  The near-term risk extends toward CAD1.00. 

The Swiss franc not the yen has been the weakest currency this week, falling roughly 2.25% against the dollar and the euro climbed to its highest level since May 2011.  Negative interest on franc deposits and some talk under pressure from industry the SNB could raise its euro floor to CHF1.25 from CHF1.20 appears to have been the hook for leveraged participants, who are thought to be the main drivers of the price action.  We expect the SNB to neither raise the euro floor nor unwind some of the reserves it has accumulated.    The SNB does not have to do a thing.  The last five centime euro rise has come to it very cheaply.  

Another important take away from this week has been the relative underlying resilience of the US economy in the face of the fiscal cliff in late 2012.  We do expect GDP to slow considerably from the 3.1% pace in Q3, but this is more reflective of the accounting function.  Manufacturing napped back from the storm related Oct decline, rising 1.3% in Nov and 0.8% in Dec.  Housing starts are at multi-year highs, accelerating from 728k pace in July to 954k in Dec.  Lastly, one of the most important high frequency data, weekly initial jobless claims and the four week moving average, used to smooth out some of the volatility, is at new recovery lows. 

Lastly, we note that German election in the state of Lower Saxony this weekend.  The importance for investors lies with the implications for the national stage.  The key in this regard is how the FDP, the junior partner in the national coalition.  If the FDP does not secure 5% of the vote to be represented in state parliament, FDP leader and Economic Minister Roesler could resign.  It would also raise the prospect that despite the popularity of Merkel, without a stronger FDP, the CDU could be forced to into a grand coalition with the SPD.  The next state election is not until Bavaria hold's its in Sept and steep CDU losses are anticipated.  

This week the German government has cut its 2013 GDP forecast to 0.4% from 0.7%, the same now as the BBK.  A deeper or more protracted downturn (and rise in unemployment) could also emerge as an important electoral consideration.