Dollar and Yen Firmer

The US dollar is steady to firmer against most of the major and emerging market currencies.  Equity markets are heavier, and oil continues to surrender some of its recent gains.  Profit-taking is weighing on eurozone bonds and JGBs while US Treasuries and UK gilts are firmer.  

The main exception to the firmer dollar is the Japanese yen.  The Bank of Japan left policy unchanged, as widely anticipated.  Its assessment was seen as somewhat less dovish than many expected.  While acknowledging that the improvement in exports has paused, and inflation expectations fell recently, updated forecasts will be presented next month.  We do not understand Kuroda to rule out further easing next month.

The 10-year breakeven was near 50 bp before the BOJ adopted negative interest rates at the end of January.   It slipped below 13 bp on February 18 when it bottomed.  It was near 35 bp before this past weekend.  

Perhaps more importantly, though not on most calendars, tomorrow major Japanese employers, especially in the auto and electronics sectors will indicate wage plans for the next fiscal year that starts 1 April.  Despite what economists regard as full employment in Japan, wage growth has been poor.  In fact, it could be argued that the failure to boost wages lies at the heart of the disappointment over Abenomics.  Businesses will likely limit this wage round due to the prospects of lower profits and economic uncertainty.  

When stripped of its rhetoric flourishes, Abenomics appears to have accentuated the disparity in the rather homogenous Japanese society.  Recent polls show waning support for Abe and his cabinet.  However, the opposition both within the LDP and in other political parties is fragmented and seemingly devoid of a clear alternative.  

The minutes from the recent meeting of the Reserve Bank of Australia did not shed fresh light on the trajectory of policy.  It seemed optimistic that the improved hiring (record quarterly jobs gain) can be sustained but remains concerned about the contagion from a slowing China.  The door to another rate cut remains open, but the RBA is not particularly in a hurry.    The Australian dollar approached $0.7600 yesterday and recorded a minor reversal pattern.   It can slip toward $0.7400 without doing much technical damage though a convincing break of it could warn of a more significant top is in place.    

The New Zealand dollar is begin dragged lower by the Aussie and some position adjustments ahead of the global dairy auction later today.   The Canadian dollar is being pushed lower by the drop in oil prices.  The US dollar had fallen to CAD1.3170 before the weekend and now is approaching CAD1.3400.  Nearby resistance is seen in the CAD1.3430-CAD1.3450 area. 

However, sterling is in the post position as the weakest major currency.  Sterling is off 1.3 cents, but the news stream is light ahead of tomorrow’s budget.   It appears to be position adjustments.  Recall that sterling bottomed on February 29 near $1.3835 and recovered to trade through $1.44 at the end of last week.  The decline this week has seen sterling retrace nearly 50% of that gain.  That retracement target (~1.4140) is just below the 20-day moving average (~$1.4160).    A break of this area could see a push back toward $1.4065.

For its part, the euro is trading mostly within yesterday’s range, which was within Friday’s range, which was within last Thursday’s ECB-inspired broad range.  We continue to put weight on euro support in the $1.1040-$1.1060 area.  On the upside, the $1.1120-$1.1140 area looks like the near-term cap.   The focus shifts to the US today with a full slate of economic releases and presidential primaries that will clarify the contest. 

Headline retail sales may be weighed down by weakness in gasoline prices,  but the GDP component is expected to have risen by 0.2% after the 0.6% rise in January.  To put it in perspective, last January and February, this core measure of retail sales fell a combined 0.7%.   Core producer prices are expected to have risen 1.2% year-over-year from 0.6% in January due largely to the base effect.  

The Empire Manufacturing survey is among the first economic readings for the new month while January business inventories are expected to be flat.  Neither tends to be market movers.  The FOMC begins its two-day meeting that is expected to result in no change in policy, a reiteration of the risks being nearly balanced and a change in the dot plots that will likely recognize scope for three hikes this year.

Regarding the Republican primaries today, the focus is on Florida and Ohio.  Trump has come on strong in Florida and a defeat for Rubio in his home state could force him out.  In Ohio, Governor Kasich is expected to win.   On the Democrat side, Clinton is expected to beat Sanders in most of the contests except Missouri.  Sanders beat Clinton in Michigan and a victory in Illinois, where Clinton lived for many years, would signal a continued slugfest to the convention.  

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