Dollar Goes Nowhere Waiting for Eurogroup

The US dollar is little changed in Europe after a quiet Asian session.  Both the US and Canada are on holiday today.  The key focus it Eurogroup meeting today.  The terms of Greece's aid are still being discussed.  

Although the Eurogroup head Dijsselbloem claimed today was a deadline as some European parliaments, including Germany, would have to approve any change in terms, and that this would need to be done before the end of the month when the current extension expires.   Yet we do not expect an agreement to be reached today.  However, some signs of progress may be needed to keep the optimism seen in the second half of last week intact.  Greek bonds and stocks saw those gains pared today, though, more broadly, European stocks and bonds are lower today. 

The most important economic data reported today did not come from the euro area, but Japan.  Japan's economy expanded by 0.6% in Q4.   The contraction seen in Q2 and Q3 ended, but without the pop that was expected.  The consensus expected a 0.9% expansion.  The year-over-year rate was 2.2% not the 3.7% forecast.  The softness was evident in both consumption (0.3%) and business spending (0.1%).  Net exports rose 0.2%.   The GDP deflator rose 2.3% rather than the 1.9% the consensus forecast after 2.0% in Q3.  

The data is sufficient to keep ideas that the BOJ will not alter is asset purchase program at this week's board meeting.  Many observers continue to expect additional measures from the BOJ as it becomes clearer that its inflation target will not be met.  Officials have signaled intentions on looking past the decline in oil prices, which are included in the core measure of CPI that the central bank targets.  

Meanwhile, Japanese bond market has turned more volatile.  The 10-year yields reached 46 bp today, the highest in nearly three months.  The yield was near 20 bp a month ago.  The government will auction JPY1.2 trillion of 20-year bonds tomorrow.  The yield of the current 20-year bond is also the highest since last November.  Some observers attribute the rise in yields to the ongoing diversification of the national pension funds,  Still, recall that under the existing QE, the Bank of Japan is buying nearly all the new JGB supply this year.  

The dollar slipped through last week's lows against the yen to reach just below JPY118.20.  A convincing break of this area would signal a test on the four-week trend line coming near JPY117.50-65.  On the upside, many observers think that recent official comments suggest a reluctant to see the greenback trade much above JPY120, which means the speculative market will need fresh incentive to challenge it.  

In Europe, there have been little market reaction to the terrorism in Copenhagen over the weekend. The Danish krone is flat against the euro and local shares are down in line with the regional slippage. Nor has there been a reaction to the German election in Hamburg.  Merkel's CDU did miserably, drawing only around 16% of the vote.  The anti-EU AfD scored just above the 5% threshold to give it  parliamentary representation in the first state in the west.  On the other hand, the FDP, which has suffered in the last couple of years, did better than expected, drawing 7% of the vote. 

Even if the votes for the AfD and FDP were pulled from the CDU, it would not have been sufficient for the CDU to have beaten the SPD in one of their strongholds.   The state of Bremen, also governed by a SPD-Green coalition goes to the polls in mid-May.  The performance of the AfD will be tracked closely, and now the FDP's revival will also be monitored. 

The euro is confined to a narrow range of less than half a cent.  It is within the pre-weekend range.  Chart support is seen near $1.1380.  Resistance is pegged in the $1.1430-50 area.   Polls indicate that most observers expect a deal to be struck that will keep Greece within the monetary union.  

Lastly, we note that the euro is trading at its highest against the Swiss franc since the franc's cap was abandoned last month.  It reached  CHF1.0645 before backing off a bit.  For its part, the dollar is continues to flirt with its 200-day moving average that is found a little above CHF0.9310. The weekly sight deposit report will be looked at closely, but it does not appear that the SNB has intervened in size last week or the week before.  

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