Dollar Jumps

March may begin as a lion and end as lamb, but the US dollar is finishing the month as it began, with underlying strength. The main exception is the Japanese yen, against which the dollar is flat, perhaps a reflection of the weaker Nikkei (-1%), and softer US shares.  

The dollar's firmer tone comes on the back of mixed US economic data.  Yesterday's personal consumption expenditures were soft, and some economists further revised down Q1 GDP toward 1.0%.  US consumers appear to have pulled back in January and February, after expanding consumption by a little more than 4% in Q4 14.  Poor weather also appears to have contributed.  

On the other hand, the solid rise in income (0.4%) saw savings rise to 5.8%, which can be expected to fuel future consumption.  A strong auto sales report tomorrow may drive the home the point that US consumer hiatus is brief.   The core CPI rate has surprised for two months to the upside, and the core PCE deflator also surprised to the upside. At 1.4%, the core PCE deflator is essentially where it was (1.5%) in the middle of last year before the slide in oil prices.  

The Fed's leadership continues to point to an increase sometime in the June-September period.  Despite downward revisions to its growth forecasts, Yellen has noted that it still anticipates above trend growth.  Although there is greater attention on the dollar's rise from policy makers, judging from comments by several Fed officials, including Yellen and Fischer, it does not appear to be overshadowing other factors or that it has risen to a point that poses an obstacle to the beginning of the normalization of monetary policy.  

European economic news does not seem to have been the trigger for the euro's slide, which is now amounting to about 3 cents in four sessions.  The euro staged a key reversal last Thursday.  It set a new high for the move just above $1.1050 and then proceeded to sell-off and settled below last Wednesday's low (~$1.09).  It opened this week in Asia near $1.09 and dropped below $1.0720 in the European morning.  Below here, support is seen near $1.0685, which corresponds to a  61.8% retracement of the euro's bounce from the March 16 low near $1.0460.  

As expected, the eurozone flash CPI estimate for March ticked up to -0.1% from -0.3%.  However, the core rate slipped to 0.6% from 0.7%.  The euro area February unemployment was reported at 11.3% while the January series was revised to 11.4% from 11.2%.  This is in part mitigated by the stronger German March jobs report.  Unemployment queues  fell 15k, a little more than expected and this saw the unemployment rate fall to a new low of 6.4%. 

The month-end, quarter-end and fiscal year-end flows, ahead of the long Easter holiday, may be overwhelming the market's reaction to economic data.  Sterling is pinned near yesterday's lows despite the unexpected upward revision to Q4 GDP on the third read.  GDP was revised up to 0.6% on the quarter and 3.0% year-over-year, despite a somewhat larger than expected current account deficit.  

Perhaps this is too old of data to matter much. The January index of services was considerably weaker than expected (-0.2% vs consensus of +0.3%), which raises questions over the pace of growth here in Q1 despite the more constructive PMI readings (note that the Markit/CIPS service PMI rose to 57.2 in January from 55.8 in December).  In addition, the election uncertainty (or is its certainty of a coalition government, or what is called a hung parliament there?) is also taking a toll, which is evident in the price action and the volatility. 

The 0.5% rise in private sector credit extension in Australia failed to lift the year-over-year rate to 6.2%, a 6-year high, was not sufficient to offset the increasing speculation that the RBA will cut rates next week.  A nearly 80% chance appears discounted by the OIS market.   Last Tuesday, the Aussie was pushing toward $0.7940.  Today it is straddling the $0.7600 area.  Some observers are playing up the slide in iron ore prices to new ten-year lows,  but we tend to put more weight on the capital market developments than the goods markets, though we recognize that after a positive terms of trade shock, Australia (and other commodity producers) are wrestling with a negative terms of trade shock. 

This includes Canada.  It reports January GDP figures today, and a 0.2% contraction is expected.  This would bring the year-over-year pace down to 2.4% from 2.8%.  In four sessions, now the US dollar has risen from CAD1.24 to CAD1.2750.  The multi-year high set earlier this month was near CAD1.2835.  During this period, oil has fallen about $5 a barrel.    At the same time, we expect sentiment to begin building for another rate cut, but not next month, but the end of May (May 27