Dollar Extends Gains, though Yen Holds Own

Last week's soft US employment data has been shrugged off as a one-off disappointment.  The JOLTS report and new cyclical lows in weekly initial jobless claims provide evidence of the continued improvement in the labor market.  The ECB's bond purchases are continuing to push down European rates while halfhearted reception to the US Treasury auctions this week has seen US yields rise. 

The euro has been pushed through the $1.06 level for the first time since March 18.   Minor support is seen in the $1.0550-80 area.    With an uncertain political outlook and disappointing industrial production data, sterling is trading at new five year lows just above $1.4600.    The $1.45 area may offer psychological support of questionable durability while the next important target comes in May 2010 low.  

UK industrial output was softer than expected. rising 0.1% instead of 0.3% as the market expected.  The weakness was concentrated in the oil and gas, which fell 3.8% while manufacturing output increased 0.4% as anticipated.  

Industrial production figures in France were the opposite.  The headline figure was fine at flat while the market expected a 0.1% decline.  However, manufacturing output was considerably weaker than expected.  The flat report there compares with expectations for a 0.6% increase and compounding the disappointment, the January figure was revised to -0.3% from -0.1%.   That said, French industrial output is not as weak as it was in Q4 and appears to be contributing positively to Q1 GDP. 

Elsewhere, Spain reported a 0.6% year-over-year increase in industrial output, and this was considerably better than expected though in part represent a shift of output from January into February.  The January series was revised down to 0.1% from 0.4%.   The Netherlands reported a 1.7% jump in manufacturing output in February and the January series was revised to show a 0.8% decline instead of a 1.0% drop.  

Recall that German industrial output figures were reported yesterday with a 0.2% increase in the month of February.  Yesterday, Greece surprised with a 1.9% year-over-year increase.  The consensus was for a 2.1% decline. 

The other noteworthy data released today was China's March inflation readings.  CPI was unchanged at 1.4%.  Food price inflation eased to 2.3% from 2.4% while non-food prices increases were stable at 0.9%.  Deflation eased slightly among producer goods (-4.6% vs -4.8%) for the first time since last July.  Next week China reports lending, trade, retail sales, industrial production and Q1 GDP. 

In the North American session, the US reports import prices, and this could impact expectations for next week's PPI report. Two Fed officials speak: Lacker, a voting hawk, is understood to be one of the officials favoring a June hike, and Kocherlakota, a non-voting dove, who is one of two Fed officials wanting to wait until next year to raise rates. 

Meanwhile, a disappointing Canadian labor market report would sway opinion in favor of a cut at next week's Bank of Canada meeting.  The consensus calls for a flat report but don't be mislead by the headlines.  In February, the headline fell by 1k, but it masked a 34k increase in full time jobs, with the decline in part time jobs offsetting it in full. 

Late yesterday the US Treasury issued its report on the foreign exchange market and the international economy.  It continues to argue that the Chinese yuan is significantly under-valued but recognizes recent liberalization steps.  The US Treasury was more critical of Japan's (over?) reliance on monetary policy than some Fed officials who have recognized that the monetary stimulus may weigh on the dollar (near-term) it will help strengthen demand (and therefore US sales).  

The German current account surplus also continued to face criticism.  Here the US Treasury is not alone.  The IMF and EU have also been critical of it.  Although German officials pride themselves on being ruled-based, it does not appear to have taken action to make good on its G7/G20 commitment to reduce imbalances or adhere to its spending commitment under NATO.  

The US Treasury appears to have slightly escalated its criticism of South Korea.   Its current account surplus continues to rise, but Korean officials resist its currency's appreciation.  The rolling 12-month current account surplus stands at a record high of $94.4 bln.  At the end of 2007, it stood at $11.8 bln.  Over that period, the Korean won has fallen 14.4% against the dollar.  It is among the weakest currencies in Asia over that period. It is twice the decline of the Japanese yen.  It has depreciated more than 31% against the Chinese yuan. Nevertheless, none of the actions reached the "manipulation" threshold.  Such a citation would force bilateral negotiations, which are said to already be taking place with Korea.