Macros and the Dollar

The US dollar has stabilized from a sell-off that took it to JPY118.50 and lifted the euro to almost $1.0750.   Disappointing US data has squeezed out some late longs and unwound the rise the implied yields of the December Fed funds and Eurodollar futures contracts.  The gap between the market pricing of a December lift-off contrasts with the surveys which showed a large majority in the June-Sept period. 

In the larger picture, after significant and sustained trend, the dollar appears to have entered a consolidative phase.   It coincides with the disappointing US data and some positive developments elsewhere, including the recovery in oil prices. 

The broad euro range is roughly $1.05-$1.10.  It could not get above the mid-point, and only briefly traded above the neckline of the double-top posted a little above $1.10 in last March and early April.  Intra-day support is seen in the $1.0575-$1.0610 area.  

German economic institutes have raised their growth projections for the world's fourth largest economy.  It has been lifted from 1.2% to 2.1% this year, and 0.6% growth in Q1.  In contrast, it appears the US economy stagnated then.  Inflation is seen at 0.5% this year and 1.3% next.   The ECB's survey of professional forecasters were also more upbeat on the region's growth prospects this year.   The bank lending survey also pointed to improvement.  Earlier today the auto industry association estimated auto sales at 10.4% year-over-year in March, the 19th month of growth.  There was an 8.6% increase in Q1 to 3.5 mln car registrations.  There is some push back that some registrations may exaggerate auto sales, but it is the best timely estimate. 

Still what holds the euro back is expectation that ECB asset purchases will continue to drive bond yields lower.  The German 10-year yield is slipping through 9 bp and a fall into negative territory seems inevitable.  There is concern that with the German government refusing to increase its borrowing, given the price, and instead planning on paying down some debt, in the context of ECB demand and private sector demand and use of collateral, that a significant shortage is developing.  Even though Draghi played this down, we note that the acceptable bonds that can be bought were increased by more than 90 bln euros by yesterday's inclusion of more supranational. 

Another weight on the euro is the unresolved Greek crisis.  The signal from European officials is that the situation has not reached a point will give Greece funds this month (and it is only the middle of the month).   Reports indicate that Greek officials efforts to reschedule or postpone repayment to the IMF were rebuffed.  It is not clear precisely where the brink is.  There have been little brinks along the way, but where the big one is, is not known with any confidence.  What is clear is that this protracted political process is undermining the economy and the financial condition. 

As the situation continues to deteriorate it would not be surprising to see some elements of contagion seep back into the market, weighing on the periphery.   This is what has happened.  Last five days, 10-year German bunds are off 6 bp.  Italian, Spanish and Portuguese yields are up 4, 8 and 15 bp.  Greece is up 163.  

Sterling remains in a broad trading range as well, though the lower end near $1.4600 was frayed at the start of the week.  The upper end of the range is seen near $1.50.  The last time it traded above $1.150 was the spike after the March FOMC meeting.  The biggest weight presently is next month's election, where the polls continue to make a majority government look difficult to achieve.   Trend line resistance drawn off the mid-March and this month's high comes in just above $1.49 today. 

The dollar has been confined to a broad trading range since Nov-Dec.  The JPY122 marks the upper end and the JPY115.50-JPY116.00 is the lower end.  More recently the JPY118-0JPY121 has defined the range.   The BOJ does not seem in a particular hurry to expand its asset purchase program and the government does not seem to be exerting much pressure.  Officials seem generally comfortable with this range trading affair.  

There are two developments to note.  First, Japan's largest business lobby said earlier today that companies have agreed to boost monthly wages by 2.59% (JPY8.5k).  In the last fiscal year the wage increase was 2.28% (JPY7.37k).  This is based on a survey a 62 large companies.  This would be the most since 1998.  These figures include base pay and seniority-based adjustments.  The auto sector had previously indicated wage increases.  That sector is giving a 2.91% increase.  

Second, yesterday's US TIC data showed that for the first time in several years, Japan's Treasury holdings surpassed China's.  While many are making a big deal about this  (Dow Jones asks "Why are Japanese Investors Piling Into Treasurys?") We demur. First, both Japan and China's holdings of US Treasuries fell.  Second, the data is not precise and the difference between China and Japan's holdings is about $1 bln.  When the magnitudes being discussed are in  hundred of billions, one billion is hardly worth explaining.  Third, there was greater foreign demand for US corporate bonds.  Fourth, investors are well aware that Japanese pension funds are diversifying away from JGBs toward domestic equities and foreign assets. 

The Australian dollar is the best performer today, rising 1.1%.  It was helped by a strong employment report that saw 31.5k full-time jobs created and the unemployment rate slip to 6.1%, the low for this year so far.  The market quickly downgraded the chances of a rate cut next month from 75% to around 55%.  The 2-year yield jumped 12 bp to 1.80%.   The Aussies is testing the $0.7785 area, which is a retracement objective of the leg down from the $0.7940 area on March 24.  A double bottom near $0.7535-50 would project toward $0.7950 provided the neck line near $0.7735 remains intact. 

The Canadian dollar may be the one major currency breaking out of its range.  The recovery in oil prices coupled with the Bank of Canada that gave not sign that it was contemplating easing policy further sparked a short squeeze for the Loonie.  The US dollar fell through the bottom of the range that has been carved out since late-January, around CAD1.2350.  This may now act as resistance.   Initial support is seen near CAD1.2240.  As a mile marker, note that the 100-day moving average is found just above CAD1.22.  The dollar has not traded below that average since early last September.