Dollar Regains Upper Hand

The dollar bulls have shrugged off yesterday's losses and have come storming back today, recouping much of the ground lost. The dollar-bloc and emerging market currencies are under the most pressure, while the yen is bucking the trend. But even here, the dollar's slippage in Asia to a new three week low near JPY100.30 was greeted with new buying.

However, sentiment toward the yen has turned more mixed.  There has been talk that new measures in Japan to regulate the margin trading by retail (which reached a record JPY443 trillion in April or ~$443 bln) may have prompted some position adjusting (short covering) in Tokyo.  

A new high in euro area unemployment (12.2%) coupled with tame inflation readings and declines in German retail sales (-0.4%, consensus +0.2%) and French consumption (-0.3%) helped turn the euro back from the $1.3060 resistance area cited here yesterday.  The euro inflation did tick up to 1.4% from 1.2%, but it is still the second lowest reading since June 2010.  The core rate stands at 1.2%, up from 1.0%, but underscores the fact that inflation is well below the ECB target of slightly lower than 2%.  Nevertheless, we continue to think that the ECB will most likely refrain from cutting interest rates again when it meets next week.

While the euro and sterling remain within yesterday's ranges, the Australian and New Zealand dollars have been sold off further.  Rumors of a soft Chinese PMI over the weekend  contributed to the selling pressures.  The Australian dollar is back below $0.9600, but the two- year low set mid-week near $0.9520 remains intact.  The pendulum of market sentiment has swung as hard to the negative side as it had previously been bullish.  Much of the news reports in the press seem to be going over the same well traveled grounds linking the Australian dollar to commodity prices and Chinese demand.  Gone are the stories about how central banks are diversifying reserves into the Aussie, or any number of bullish stories that dominated the press.    

The New Zealand dollar has been sold off through $0.8000 to trade at its lowest level since last September. The recent economic data (building permits, terms of trade, business confidence) have been mostly constructive.   The weakness of the Australian dollar, some thoughts that the RBNZ may step up its intervention, so as to push NZD in the direction the market is taking it to get the bigger bang for the buck of intervention, and the thinner traded market, is largely responsible for the more dramatic losses. 

The US dollar appears to be stabilizing as North American traders return to put the finishing touches on what has been a tumultuous week.  The Japanese bond and stock markets stabilized here at the end of the week, with the help of data showing that deflation lessened and output rose.   The data stream includes April personal consumption and income figures, both of which are likely to be flattish.  More attention may be on the Fed's preferred inflation measure, the core PCE deflator, which may set a new record low.  

The Chicago PMI will also attract interest.  Recall that in April it had fallen below the 50 boom/bust level for the first time since Sept 2009.  The consensus expected it to bounce back to 50, but any disappointment with a low deflator, following yesterday's increase in weekly jobless claims,  may weigh on the greenback, though help Treasuries.  The 10-year yield which hit 2.23% near mid-week, is now back below 2.10%.