Dollar Slips Lower into the Weekend

The US dollar is softer against all the major currencies today, led by the euro and sterling. The main exception is the New Zealand dollar.  Dovish comments by the deputy governor of the RBNZ fanning speculation of an easing bias at next week's policy meeting caught a speculative market that had turned net long (at least in the futures market).

There are three considerations behind the heavier US dollar tone.  First, a disappointing data has raised some doubts over the strength of the spring pick-up.  In turn, this boosts expectations for a dovish FOMC statement next week.

Second,   there is some cautious optimism over Greece creeping in, and this seems to be supporting the euro.  It has tested the $1.09 area after bouncing off support in front of $1.0650 in the middle of the week.    Greek yields have fallen since mid-week, with the 3-year yield off almost 750 bp since Wednesday high (to about 23.6%), for example.  

Sterling marched to $1.5150, it highest level since the March FOMC meeting.  The main impetus, beside the generally softer US dollar environment, are reports suggest that hedge funds are positioning for a relief rally after the May 7 election.  

The dollar tried establishing a foothold above JPY120 but has failed thus far, and this has encouraged a move to the sidelines, which has allowed the dollar to ease to JPY119.15 before a good bid was found.  

The main feature of the North American session is the volatile durable goods orders report.  Orders for durable goods have fallen in five of the past seven months.  A small 0.6% increase is expected according to the Bloomberg consensus.  The dollar is vulnerable to an asymmetrical reaction.  Disappointing data seems more negative for the dollar than good news is positive.  Barring a significant surprise, it may not alter expectations for Q1 GDP, where the consensus forecast of 1.0% seems on the high side. 

The euro zone finance ministers meet today to discuss Greece.  Although officials report progress, there is unlikely to be any resolution today that results in new funds for Greece.  Many are looking past today's meeting and toward the next on May 11.   Despite some of the official creditors acknowledging mistakes in the terms of the two aid packages, there still seems to be an insistence that the flawed programs be adhered to by the Greek government.  

The actual news stream is fairly light relative to the price action.  The only data of note was the German IFO survey.  The measures of the business climate and conditions improved.  The expectations component did not.  This echoes the ZEW survey.  It is as if the weakness of the euro, low interest rates, and stock market are seen as the best things get.  

The key question that many participants will be mulling over the weekend is whether the dollar is breaking down out of the ranges.  We note that except for the Canadian dollar where the pendulum of expectations has swung away from additional monetary easing, the US dollar remains within the ranges seen since mid-March when the uptrend morphed into a consolidative phase.  In addition, there has not been a shift in Fed expectations despite the softer, second tier data.  Specifically, the December Fed funds contract implies an average effective funds rate of 45 bp compared with 44 bp at the end of last week.  This is also evident in the December Eurodollar futures contract that implies a yield of 61 bp now compared with 59.5 bp a week ago.