Krona Moves, but Consolidative Tone Threatens

The US dollar is mixed here at mid-week. The upside momentum seen in the euro, sterling and yen yesterday has faded, and a consolidative tone has emerged in Asia and the European morning. The Antipodean currencies have extended their gains and are at new highs. The Canadian dollar is struggling to match their strength as the greenback bounces off the approach to CAD1.09. 

The Swedish krona is the biggest mover among the majors, losing 0.4%, following the Riksbank decision, which left rates on hold, but signaled a greater chance of a cut as early as the next meeting in July. 

Yesterday’s sharp yen advance still has traders a bit shell shocked. Carry trades and risk assets were the rave, and but the yen’s strength was a dominant factor and helped push the Nikkei down over 2% earlier today, gapping lower for the third consecutive session. It is now approaching last month’s lows and the return of the dollar above JPY102, better, a slight rise in US yields and global equity gains could lend the Nikkei support on Thursday. 

We note that the Swiss franc was also relatively firmer yesterday, gaining more a bit more than the euro. The strength of the yen and franc gave the sense that it was a dollar move, partly on the back of softer US yields. There is much talk about the “golden cross” in the 10-year Treasuries, where the 50-day moving average of the yield has crossed below the 200-day moving average, using the generic calculation. This is supposed to project a trend lower in the US bond yields. 

On the other hand, US regulators introduction of a new leverage ratio rule that appears to require the largest US banks to hold an extra $68 bln in capital as of January 1. This points to a modest tightening, and there is some speculation that this could be seen in the effective Fed funds rate. (6-9 bp since Oct). 

The FOMC minutes from last month’s meeting are the unlikely highlight of a North American session devoid of market sensitive economic data (wholesale inventories). The minutes are not likely to be as hawkish as the market’s initial reaction suggested. Yellen repeated several times at her press conference that there was no intent to signal a change in stance or outlook. Before the conclusion of the two-day FOMC meeting, the Dec 15 Eurodollar futures implied yield was near 98 bp. It rose to 114 bp at the conclusion of the FOMC meeting and Yellen’s press conference and proceeded to rise to 124 bp in the subsequent few sessions. It was still at 122 bp at the end of last week before the jobs data. It is now near 110 bp and may fall a bit further. 

There are three developments in Europe to note. The most important was the Riksbank meeting and the lowered repo path, which has seen an increase in the likelihood of a rate cut from about 15% to near 40%. The key is prices not growth. The central bank’s CPI forecast was cut to 0.2% from 0.6%, even as the growth forecast was lifted to 2.7% from 2.4%. Recall that yesterday the revised up its forecast for Swedish GDP to 2.8% from 2.3%. High household indebtedness remains an issue, especially for the hawks, but the low inflation concerns generally outweigh this and it is here that investors need to look for insight into what officials will do in July. There are three inflation reports out between now and then. 

The euro initially eased on the stand pat policy, but quickly rallied when the implication was realized. The euro jumped from SEK8.92 to SEK9.0, just below the year’s high set in late February near SEK8.91. Last December, the euro recorded the 2013 high near SEK9.10. 

The second development was the German trade and current account figures for February. Exports fell 1.3%, more than twice the decline the market expected, while imports were up 0.4%, compared with the consensus forecast of a 0.1% rise. The current account surplus fell to 13.9 bln euros from a revised 15.2 bln euros in January. The consensus called for an 18 bln euro surplus. This is not inconsistent with the recent survey data warning that the European locomotive was losing some momentum. 

The third development was in the UK. The trade deficit was reduced slightly, but remains wide and the growth differentials (and rise of sterling) warn of the risk of further deterioration. NISER projects the UK economy expanded by almost 1.0% in Q1. The merchandise trade deficit slipped to GBP9.09 bln from GBP9.46 bln (revised from GBP9.79 bln). The improvement can be completely accounted for by the billion pound improvement in the trade balance with non-EU countries. Separately, we note that BRC shop prices fell for the eleventh month (-1.7% from -1.5%). Non-food prices fell 3.2%, led by clothing.