The Dollar is having a Reasonably Good Friday

The holiday shutters most markets today.   Several Asian markets were open, and equities were narrowly mixed, with Japan and China posting small gains.  Most of the other local markets, including Australia, Korea and Taiwan slipped. 

The US dollar is trading with a firmer bias, but mostly, as one would expect, within yesterday's ranges.    Three observations are worth sharing. 

First, within the modest movement today, sterling is the weakest of the major currencies, as it has been for the week.  The combination of the Brexit fears, concern that the Tory Party itself is being torn asunder by very referendum that the Prime Minister had hoped would unite the party, and the unwinding of the recent record large jump in speculative long sterling positions in the futures market has kept the pound under the cosh.   Today is thus far the first session this week that sterling has not traded below the previous day’s lows. 

Second, the dollar has risen to its best levels against the Japanese yen since the FOMC meeting and is trying to build a foothold above JPY113.   Each session this week the greenback has recorded a higher high and a higher low.   Japan's CPI data disappointed and that disappointment keeps open the possibility that the BOJ takes additional measures as early as next month.  

The headline February CPI came in a 0.3% as expected.   The targeted rate, which excludes fresh food, remained stuck at zero for the second consecutive month.  When both fresh food and energy are excluded,  prices rose 0.8% year-over-year, which for the sake of comparison, is the same level as reported by the eurozone for the same period.   Tokyo CPI is for March, and here the disappointment was not just the lack of upside progress, but excluding fresh food and energy, deflation deepened to -0.3% from -0.1%.  The Bloomberg consensus forecast was for a 0.2% decline.

Weak growth (the Japanese economy contracted in Q4 15), practically non-existent wage growth, and the yen's strength, which offsets the increase of some import prices, including oil, makes is difficult to see how the 2% inflation target will be approached anytime soon.   Hence the pressure on the BOJ to do more.   For its part, the government may turn to 1) front loading a supplemental budget for the new fiscal year that begins next month, and 2) delay the sales tax increase planned for April 2017.   The delay of the sales tax may be announced at the late-May G7 meeting hosted in Japan.   A delay in the tax would be consistent G20 call last month.  

The other news from Japan today that will likely get lost is the weekly portfolio flow data from the Ministry of Finance.  This is the time of year that one typically expects repatriation by Japanese investors ahead of the fiscal year-end.  Not only is this not happening, but the opposite.  Specifically, the MOF data shows that last week, Japanese investors bought a record amount of foreign bonds (JPY2.276 trillion or ~$20.2 bln).  It is not just a one-week phenomenon.  The four-week average also is at a record high (~JPY1.4 trillion).  

Although US markets are closed, the government will report another revision of Q4 GDP.  The consensus looks it to be unchanged at 1.0%.  However, we suspect there may be scope for downward coming from services.   The new news will be the estimate of corporate profits.    The decline that is expected stems largely from the energy sector, including a large fine for the Gulf spill. 

Claims that the US is recession-bound arises from two issues:  the decline in profitability and the tightening of conditions picked up by the Fed's survey of senior loan officers.  We are less convinced, and see continued resilience in the nearly 70% of the economy driven by the consumer.  

Moreover, the regional Fed surveys for March suggest that the quarter is ending on an upbeat note, and the increase in new orders point to the momentum carrying into Q2.  Next week, we expected Yellen to reiterate what she said in her recent press conference that the April meeting is live, and another nonfarm payroll increase of around 200k may will reinforce that message.  

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