Dollar Slumps

The US dollar is lower across the board today. It has been soft, and its recent losses were extended in North America and then in Asia and Europe today. We had expected heightened tensions ahead of this weekend referendum in Crimea and financial pressures in China would have helped underpin the dollar. Instead, investors seem somewhat indifferent to the geopolitical tensions and focus on the seeming recalcitrance of the ECB to ease conditions despite the disinflationary/deflationary and near record high unemployment.

The recovery of copper prices in yesterday's North American session helped boost the Australian dollar after it had fallen to a six-day low and then a spectacular employment report. Employment rose three times more than expected in February, and the decline in January was revised away. Australia reported a 47.3k increase in jobs and January was revised to 18k from -3.7k. The details were even better. There were 80.5k full-time jobs created and in January 2.7k (not a loss of 7.1k). The unemployment rate was unchanged as the participation rate rose to 64.8% from a revised 64.6%.

The Australian news followed New Zealand's 25 bp rate hike (lifting the cash rate to 2.75%). This had been largely anticipated, but the central bank statement was even more hawkish than expected. The tightening cycle that has now begun is expected to be more aggressive than previously anticipated, with the cash rate peaking closer to 5.0% rather than 4.5%. The increase is thought to be roughly evenly divided between this year and next.

It is revealing that the RBNZ increased its growth and CPI rates and at the same time increased its forecast for the trade-weighted index of the currency.  Governor Wheeler said that the strength of the New Zealand dollar was a headwind on the tradable sector and was not sustainable in the long-run.

The New Zealand dollar is at new highs for the year as it approached the high from last May near $0.8585. The next target is the 2013 high near $0.8675. For its part, the Australian dollar is more than a cent and a half above yesterday's low and approaching the recent highs in the $0.9115-35 band.

The market has shrugged off disappointing Chinese data that show a distinct loss of momentum. The period covers both January and February as an effort to smooth the lunar new year holiday distortions. Retail sales rose 11.8%. The consensus was for 13.5%. Industrial production rose 8.6%. The market expected 9.5%. Fixed investments rose 17.9%. The consensus forecast called for a 19.4% increase.

The national legislative session ended, and Premier Li emphasized the flexibility around this year's growth target of 7.5%. It seems too early to look for a cut in required reserves, but there has been more talk along these lines. Separately, we note that the Chinese shares were the strongest in Asia, with major indices gaining more than 1%. The ostensible spark was reports suggest that soon listed companies will be allowed to issue preferred shares. Companies that are rumored to be among the first in line did especially well, according to reports.

Japan reported a much larger than expected jump in machine orders, a proxy for capital investment. The 13.4% increase in the month of January was nearly twice the consensus forecast and bodes well for Q1 growth, which is expected to show substantial improvement over the 0.2% pace recorded in both Q3 and Q4 13.

Separately, the MOF reported that Japanese investors sold foreign bonds for the second consecutive week and have now full offset the purchases in the previous two week. Foreign investors bought JPY384 bln of Japanese shares last week, the most for this year, so far.

News from Europe is considerably lighter. There were two reports, both of which may offer ECB officials a bit of comfort. First, Spain reported a much better than expected 0.5% rise in retail sales in January (seasonally, adjusted year-over-year). The consensus was for a 0.8% decline, following the 1.0% decline in December. Second, French inflation ticked up to 1.1% on a harmonized basis in February from 0.8% in January. Germany's February CPI will likely be affirmed tomorrow at 1.0%. The deflation wolf is not at the EMU door (yet), even if there are pockets of it in some peripheral countries, regaining competitiveness through an internal devaluation.

The euro is near $1.3960 as the North American session is about to begin. The next psychological and technical target is $1.40. Options and other derivatives are thought to be struck around there. Ironically, the stronger the euro, the more likely the ECB will ease policy next month.

The North American session features US retail sales. We will be paying close attention three elements: 1) how the data does relative to expectations; 2) the serial improvement, 3) the GDP component that excludes autos, gasoline and building materials. The headline is expected to increase by 0.2% after a 0.4% decline in January. The GDP component is expected to rise 0.2% after a 0.3% fall.

In addition, the Federal Reserve governor nominees will appear before the Senate. All three (Fischer, Powell and Brainard) have published their opening remarks. They all support the current stance, but there may be some headline risks. Opposition from the Fed's course is considerably more pronounced among the regional presidents than the Board of Governors.

Separately, Canada reports housing prices and a 1.3% rise is expected, matching the December increase. The US dollar is a big figure lower from yesterday's CAD1.1150 high. Support is seen near CAD1.1030, though last week's low was set near CAD1.0960 and would be the next target.