FX Rangebound Ahead of Key Events; Dollar-Bloc in Focus

The US dollar is confined to the well worn ranges of recent days. With a couple of brief exceptions, the euro, sterling and the yen continue to trade within the ranges set last Friday. The main events of the week--the ECB and BOE meetings and the US jobs report, still lay ahead.

In addition to the continued rally in global equities, the other noteworthy development in the first half of week has been the stabilization of Italian markets, even though the solution to the political stalemate remains elusive. With today's declines, Italy's 2-year yield has fallen 50 bp from last week's peak and the 10-year yield is off 32 bp. The stock market is up about 2% thus far this week.


Ahead of tomorrow's central bank meetings, which include Shirakawa's last meeting at the BOJ, the Bank of Canada meets.  Although it is universally expected to keep the overnight rate at 1%, the statement is likely to show a continued evolution away a more hawkish stance.  In January, the central bank's statement indicated that the need to remove accommodation, which it previous had indicated may be necessary, was less imminent.  With disappointing growth and subdued price prices (headline CPI Jan year-over-year was 0.5%), a further softening of its stance is warranted.  

The Canadian dollar has been the second weakest currency against the US dollar since mid-January.  With a 4.3% decline, it is only exceeded by sterling's 6.2% decline.  We have noted that the net speculative position has turned to a net short Canadian dollar position for the first time since last August.   BOC Carney timing in going to the UK may be prescient as Canada's financial challenges with housing market valuation issues, household debt levels, potentially deflationary impulse, following a credit downgrade of the major Canadian banks in late January.  We project potential for the US dollar to continue to trend higher today CAD1.0450-CAD1.0500 in the coming weeks.

The Reserve Bank of Australia met yesterday and left rates steady.  Q4 GDP was released earlier today and it s showed the anticipated 0.6% quarterly increase for a 3.1% year-over-year pace.  The Australian dollar extended its three day rally that began off 7-month lows near $1.01 on Monday to briefly poke through the $1.03 level.  It traded above its 20-day moving average for the first time since Jan 24.  It also corresponds to a retracement objective of the decline from $1.06.  North American operators may try another run at the highs, but stronger sellers are likely to emerge in front of $1.0350. 

The New Zealand dollar extended its gains since Monday's low for the year was set just below $0.8200. The results of its milk auction appeared to provide the impetus.  Global dairy prices rose 10.4% to the highest level since June 2011.  It was the largest rise since the middle of last year and comes on top of the 3.1% rise a fortnight ago.  For New Zealand, the price of whole milk powder is particularly important.  It is its biggest export by volume.  The price jumped 18%.  Milk accounts for about a quarter of New Zealand';s exports earnings and roughly 7% of GDP.  The rise in milk prices does not necessarily reflect wider profit margins.  The drought conditions warn of higher costs.  

The New Zealand dollar has generally under-performed its Aussie cousin since mid-February and this looks set to continue.  There is scope for the Australian dollar to rise toward NZD$1.25.    Against the greenback the $0.8360-$0.8400 may offer formidable resistance to sharp gains.