Dollar Heavy, Poised for More Losses

The US dollar continues to trade with a heavier bias, though largely within recent ranges against the major currencies and emerging market currencies. Among the majors, to note is that sterling and the Australian dollar are trading at new multi-week highs. The wait to see the JPY100 print is being dragged out, though the markets willingness to sell into even modest bounces in the yen seems clear.

The 10-year US-Japanese yield differential is at its best level since the BOJ announced its Q-squared (qualitative and quantitative easing at a little over 125 bp. Japan's 10-year yield reversed yesterday's gains, but longer-end yields rose further today. US 10-year yields have risen from the non-farm payroll low below 1.7%. 

We suspect many observers give too much credence to the FOMC minutes where the ongoing discussion of exit strategies and timing are discussed. Bernanke's warning about the "spring slump" is important and indicates it its premature to expect the Fed to begin tapering off the asset purchases any time soon. Indeed today's data will be seen in light of that warning. Weekly initial jobless claims have backed a bit recently and officials do acknowledge some problem with the adjustment around Easter. Claims are expected to fall back 25k, though economists will be looking at signs of the sequester's impact. 

March retail sales will be reported at the same time. The Bloomberg consensus is for a flat headline reading, while our concern is some downside risk due to the drop in (~3.5%)gasoline prices. The drop in gasoline prices may have helped bolster discretionary spending, which would allow the component used for GDP calculations (excludes autos, gasoline and building materials) to still rise. The resilience of the US consumer to the end of the payrolls savings tax holiday remains a notable development in Q1. 

More broadly, consider that retail sales in February amounted to $421.4 bln. This represents a nearly 8% increase from the recession lows and is 0.7% below the peak, when adjusted for inflation, in November 2007. Separately, the US releases March import prices and this will continue to show the lack of imported inflation. A figure substantially off the 0.5% decline the consensus expects could have a knock-on impact on expectations for tomorrow's PPI report (consensus now is at -0.2%).

The Australian dollar has extended its recent advance. On Monday it hit a low near $1.0350 and has moved within striking distance the $1.06 cap that has been the bulls' nemesis in both December and January. Technical indicators give it scope to take it out, and quest for yield in the private sector coupled with reserve demand from the official sector, provides a fundamental basis. 

Today's gains are all the more impressive because they come in the face of a disappointing employment report. Rather than lose 7.5k jobs, Australia reported a loss of 36.1k. This was not blunted much my the slight upward revision to the February time series. Australia lost 7.4k full time jobs. The unemployment rate jumped to 5.6% from 5.4%, despite the continued decline in the participation rate, and is the highest since Q4 2009. While the easier monetary policy--175 bp cuts in this cycle, may have helped housing and retail sales, its impact on the labor market is minimal.

The impetus for sterling's rise is less clear. However, the bullish flag pattern we noted earlier this week continues to unfold and today's advance, if sustained, would lend credence to it.  The next immediate resistance is seen near $1.5425, but we continue to hold out the prospects of a move toward $1.56.  For its part, the euro continues to flirt with the 38.2% retracement of the slide form the early February test on $1.37.  A move above $1.3120 would give the single currency scope for another near-term cent advance.