Dollar Extends Gains in Asia and Europe, May Surrender them in North America

After last week in which the dollar lost ground all the major currencies, it has mostly extended its recovery today.   The yen may be an exception. 

The greenback was testing resistance near JPY102 and was pushed off on news Prime Minister Abe did not press the BOJ’s Kuroda to ease policy more. We lean in the opposite direction. Press reports suggest some Japanese businesses are pushing through price increases on top of the retail sales tax hike. The risk to inflation on the upside in the immediate period ahead, as the beginning of the new fiscal year also often see price increases. In any event, the dollar has been confined to a 30 pip range against the yen in mostly lethargic activity. 

China’s financial reports dominated the market’s attention. New yuan loans increased by CNY1.05 trillion. This was largely in line with expectations. It is only the seventh time since the beginning of 2010 that it surpassed CNY1 trillion. There is a large seasonality function. Consider that yuan loans have risen in January and fallen in February consistently over the past nine years. In March, yuan loans have risen in all but one of the past ten years. 

The yuan loans accounted for about half of the aggregate financing which rose by CNY2.07 trillion. This was more than 10% above expectations. Given the seasonal distortions, it may be helpful to compare Q1 13 to Q1 14. In the former period, aggregate financing rose CNY6.165 trillion. In the first quarter of this year, it rose CNY5.593 trillion. 

Separately, China reported that the foreign reserve rose to $3.95 trillion at the end of March. This represents an increase of $129 bln over the period. This is roughly the same amount as in Q1 13, but less than in Q4 13 (~158.5 bln). Adjustments need to be made for valuation and interest payments, so the real new addition to reserves is somewhat less. The trade surplus in Q1 was about $17 bln. Although there seems to be a bit of a difference of opinion, it does not look like there was massive intervention to weaken the yuan, but it met little official resistance. 

The UK reported the other big news of the session. Consumer prices eased to 1.6% from 1.7%. This is the slowest pace since October 2009. It is the third consecutive month that the reading is below the BOE’s 2% medium term target. If the inflation is not in the consumer sector, some fear it may be showing up elsewhere. The ONS reported today that annual house price inflation accelerated to 9.1% in February, nearly a 4-year high. In London, ONS found, house prices have increased almost 18%, the most in nearly 7 years. Separately, producer prices continue to fall. Input prices are off 6.5% from a year ago, the largest drop since 2009. 

Short sterling interest rates ticked up and sterling itself recovered smartly on the news. Prior to the report, it has tested the $1.6660 area, which corresponded to a retracement target of the run-up since April 4, $1.6555 low (to last week’s high near $1.6820). After the data it bounced to session highs above $1.6730, where it ran out of steam. 

For its part, the euro is a bit lethargic. It traded below $1.3800 in the European morning, but support we identified near $1.3780 remains intact. Intra-day technical readings warn of a recovery, but without fresh incentives, the $1.3820-30 area could limit the recovery. The main economic news was in the form of the German ZEW survey, which was consistent with recent surveys that points to a constructive assessment of the status quo but fear that this is the best it gets and this is reflected in weaker expectation components of the surveys. 

In today’s ZEW survey, the assessment of current conditions rose to 59.5 from 51.3, well above the 51.5 consensus. This is the highest reading since mid-2011. The expectations component fell to 43.2 from 46.6. This is the lowest reading since last August. 

Today’s North American session features the March CPI reading (expect stable core reading 1.6% and headline rate just below that), and the April Empire manufacturing survey. The February TIC data may be interesting as analysts will scrutinize the report for insight into shift of Treasury holdings, with Belgium’s recent rise a talking point. The big drop and then recovery in the Federal Reserve’s custody holdings took place in March and so will not be picked up by today’s report.

Separately, there are no fewer than five Fed officials that speak today. Two are non-voting members (Lockhart and Rosengren). The two regional presidents that do vote (Plosser and Kocherlakota) are not part of the FOMC centrist consensus. Plosser is a hawk and Kocherlakota, is a dove and dissented from the last FOMC statement. In any event, Yellen here self is speaking to a financial markets conference. This is not a forum where investors should expect new revelations. Still, methodologically, we would still argue that Yellen is the signal to hone in on. 

We note in this context that yesterday’s retail sales and inventory data gives more insight into the state of the economy. On balance, it appears the US economy slowed to around 1.5% in Q1. Addition to the weather, inventories appear to have taken off as much as 0.5%. However, the early signs point to a smart recovery in Q2 to 3% or above.