Dollar Sets Back After Testing Top of Range

The US dollar is mostly lower as liquidity thins, and soft economic data kept the bulls penned.  The soft ADP estimate and weaker than expected manufacturing ISM offset the heightened rhetoric about Greece's 460 mln euro payment due to the IMF next week.  

The ADP estimate need not mean a poor national figure.  Even with a small upward revision to its February estimate, at 214k, it still sorely underestimated the government's figure of 288k private sector jobs.   The ADP provides a good guide to the general pattern of private sector job growth but on a month to month basis, there are periods of significant gaps.   

Separately, we note the strength of US auto sales.  March sales accelerated to a 17.05 mln unit pace, which was above expectations and the highest since last November, which itself was the second highest since the crisis.  It snaps a three month declining streak and points to a recovery in retail sales.   Still, the bottom line is that growth sputtered in Q1 15, similar but not as poor as Q1 14.  Like others, including the Federal Reserve, we expected some of the headwinds to prove transitory, like the weather and the labor dispute at the West Coast ports.  We recognize that strong consumption in Q4 14 may have also encouraged some retrenchment in consumption over the last few months.  The continued job creation and the increase in savings will likely help fuel household consumption.  

Today’s data includes weekly initial jobless claims, which are overshadowed by tomorrow’s national figures.  The trade balance may be of greater interest, especially in of the focus on how the dollar’s strength is dampening net exports.  The consensus is for little change in the deficit from the January shortfall of $41.8 bln.   Yellen speaks a few minutes after the data, and her comments pose some additional headline risk.  

Before the US data, the ECB will release the account (minute?) of its March 4-5 meeting that provided more details about the sovereign bond purchase program.  More insight into the discussion of the implementation will be gleaned.   The anticipation of the purchases already had weighed on the interest rates and the euro while helping to lift equity prices.  Concerns among investors include the squeeze on supply, especially bunds, which Draghi has played down, and that the economy is already enjoying a cyclical recovery.   

The euro found support in the previous two sessions near $1.0720.  As we noted yesterday, the $1.07 area (down to $1.0680 retracement level) may mark the bottom end of the euro’s range.  The top side comes in near $1.10 (to $1.1050).   The risks over Greece may prevent a move to the upper end of the range in the coming days, barring a significant disappointment with tomorrow’s US jobs data.   Within the larger range, the $1.0880 are may offer resistance to a range extension in North America today.  

The Australian dollar is the weakest of the major currencies, losing 0.5% against the US dollar.   It is being sold to new multi-year lows today (~$0.7555).  The third consecutive monthly widening of the trade deficit did not do it any favors, but the real driver is heightened speculation of a rate cut next week.  The OIS market is 80% confident and 100% confident of a move in April or May.  While oil prices have stabilized, iron ore prices have not.  

We are seeing more references to the decline in iron ore prices as a justification for fresh Aussie shorts and we recognize that after being helped by a positive terms of trade shock, Australia, like other commodity producers, are being hampered by a negative terms of trade shock.  However, the relationship between its large commodity export and the currency is not stable.  Efforts to look at where the Aussie was (~$0.6600) the last time iron ore prices were below $50 is not particularly helpful. 

Sterling remains heavy.  The disappointing construction PMI (57.8 vs 60.1 in February and 59.8 consensus) did not help, but the real focus is on the politics.  Tonight in the UK, seven party leaders will debate on television.  The polls continue to point to a statistical dead heat between the Tories and Labour.  That makes a coalition government highly likely.  Outside of UKIP, the Tories do not have many allies.  The Lib-Dems, the junior member of the governing coalition, appear to have been so weakened by participating in the government that it may not have secure enough seats to produce another majority government.   Although the sharp decline in oil prices would have created a nightmare for an independent Scotland, the Scottish National Party, which is going to take nearly all of Labour’s seats in Scotland, injects another element of uncertainty into the mix. 

The Bank of Japan meets next week.  After the disappointing Tankan, which itself followed last week flat CPI report has sparked pressure on the BOJ to take fresh action.   Those who anticipate a BOJ response see next week’s meeting as a debate that will lead to a move at the month-end meeting.  However, the BOJ appears to be resisting.  It appears to be maintaining its view that inflation will pick up later this year.  It is watching the spring wage deals, and several car companies have already indicated pay increases.    Separately, we note that into the end of the fiscal year, Japanese investors stepped up their purchases of foreign bonds.  The JPY1.017 trillion was the most foreign bonds purchased since last November.