Dollar Firms in Quiet Trade

The US dollar is firm as the losses suffered in the wake of the FOMC meeting are retraced.  Over the last few days, no less than five Federal Reserve officials have come out endorsing a resumption of the normalization cycle.  And no fewer than three regional Fed manufacturing surveys have shown greater strength than expected, with gains in forward-looking new orders.  

The two-year US premium over Germany is the middle of this month's range near 137 bp.    The 10-year spread reached new highs for the year yesterday near 174 bp.  This represents a 14 bp increase since the FOMC meeting.  

The euro is approaching the 61.8% retracement of the FOMC-inspired gains, which is found near $1.1165.  Additional support is seen near $1.1125, but the key may be the $1.1040-60 breakout area. 

Sterling is heavy.  After closing poorly yesterday, follow-through selling has pushed sterling to toward $1.4155.   While some of the short-term technical readings are getting stretched, we are cognizant that in the week ending March 15, speculators in the futures market bought a record amount of sterling contracts.   These late longs are in weak hands, and their culling could extend sterling's decline. 

The dollar's recovery in general and Brexit anxiety, in particular, is weighing on the pound.  It is not just yesterday's attack on Brussels, faux pas by one of the leading spokespersons for the remaining in the EU camp, the Chancellor of the Exchequer Osborne.  

Osborne's economic plan was the centerpiece of the Tory's campaign less than a year ago.  It now lays in ruins.  Much sacrifice has been demanded, but the objectives remain elusive, even with some trickery.   Even if the other economic assumptions prove accurate, there is a GBP4.4 bln budget gap that will not be addressed in the Autumn Statement.  The question many are asking now is whether Osborne will deliver it.  

News that API estimate of US oil inventories jumped 8.8 mln barrels (consensus was 1.5 mln) is weighing on oil prices, ahead of the DOE figures later today.   The heavier tone of commodity prices, in general, is encouraging profit-taking in the dollar-bloc currencies.    The Canadian dollar did not react to the presentation of the budget.  The broad details had been mostly anticipated.  If anything, the market has concluded that the budget also favors a stand pat central bank. The Canadian dollar's upside momentum has eased since the end of last week, but it is consolidating more than correcting. 

The Australian dollar is holding up alright.  It is within yesterday's range.  The New Zealand dollar is a bit more worrisome.  It is at new lows since the FOMC meeting.  A break of $0.6690 would weaken the near-term technical tone and warn of the risk of a return to the lower end of the range seen a cent lower. 

The US 10-year premium over Japan is at 205 bp today.  The most since September 2014.  This is more than 40 bp higher than the low seen on February 11 and 13 bp higher than last week's low.  The widening premium appears to be lending the greenback support.  Today is the third consecutive session the dollar is recording higher highs and higher lows.    It has approached resistance in the JPY112.80 -JPY113.00 area. 

Early tomorrow in Tokyo, the CPI will be released.  It is a piece of the economic puzzle that must be seen to add to pressure on the BOJ to ease policy further.  The BOJ's Funo was quoted on the wires today urging the central bank to proceed with monetary easing.  The core rate, which excludes fresh food, is expected to unchanged at zero.  Excluding fresh food and energy, prices are expected to have risen 0.8% in February after 0.7% in January.   Incidentally, the eurozone core consumer prices rose 0.8% in March, in the preliminary estimate. 

A light North American session is anticipated.  US economic data is limited to the MBA mortgage applications, new home sales, and the DOE energy report.  The Fed's Bullard speaks, but he spoke earlier this week and favored a resumption of the hiking cycle soon. 

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