Dollar Underpinned Ahead of Retail Sales

The US dollar has largely been confined to yesterday's ranges, as it consolidates recent gains.  Today's March retail sales report in the US is important.  Retail sales have fallen three consecutive months.   Ideas that this weakness was a function of two transitory forces will be tested.  Those forces are the poor weather and the pullback after the biggest shopping spree in a decade (Q4 14 consumption component of GDP).  

Spring has sprung, more jobs equal more income, and household savings have ticked up providing the fuel for new consumption.  We also note that US consumption is not being funded new revolving credit.   March auto sales were strong and high gasoline prices should help lift the headline by over 1%, the most since last February-March.  The components that feed into GDP calculations is expected to be up a healthy 0.5%, which would more than offset 0.3% decline seen over the past three months. 

While the perceived odds of a June lift-off have diminished, we expect the coming data to strengthen ideas that the move takes place in September.  For whatever the reasons, the quarterly pattern of GDP remains intact.  Over the last five years, Q1 GDP have averaged about 0.6%while the rest of the quarters have averaged about 2.8% at an annualized pace.

There have been three macro-economic developments to note.  First, the UK made its last inflation report before the elections.  Deflation was avoided with an unchanged zero year-over-year rate.  The core rate, however, unexpectedly slipped to 1.0% from 1.2%.  This provided a handy excuse to take half a cent from it.  Sterling found support near $1.4600 and did not have to return to yesterday's low near $1.4565.  Earlier the BRC reported a sharp 3.2% rise in like-for-like sales, and sterling hardly ticked up.  The asymmetrical market response reflects participants anxiety ahead of the May 7 election. 

Second, after several countries reported better industrial production figures, the eurozone reported a 1.1% rise in the aggregate February figure. Some of the shine was tarnished by the revision to the January series from -0.1% to -0.3%.  Still, the year-over-year rate rose to 1.6% from 1.2% (before the revision to 0.4%).    The euro firmed a little in reaction but has been unable to reclaim the $1.06 handle so far today.  

Two negatives weigh.  The first is the media report that has been denied that Greece is threatening to default on its debt payment due later this month unless it gets more aid (aid needed not for government expenditures but to service debt).  The report has been denied, but the issue remains a concern, and Greek 10-year bond yields are extending their rise beyond 11%.   Today's 14 bp increase is half of the five-day rise.  The 3-year yield is up 89 bp today to 22.13%.  It was near 12% in late-February. 

The second negative weight on the euro is the continued decline in German bund yields, with a new record lows being recorded.  At 14 bp, the German 10-year bund yield is less than half the comparable Japanese yield.  Peripheral bond yields are also a little softer today.  

The third macro-economic development to note is the lower than expected Swedish inflation readings.  The headline rate rose 0.1%; the market expected a 0.2% increase.  The year-over-year rate rose to 0.2%; the market expected a 0.3% rate.  The underlying rate was unchanged at 0.9% year-over-year.  The disappointment has spurred speculation that the Riksbank may expand its QE efforts, which it recognizes cannot keep pace with the ECB.  Swedish bonds have been the winner, with yields falling more than 3 bp to a new record low just below 28 bp.  The euro bounced off of SEK9.30but remains below yesterday's high near SEK9.3760. 

Separately, many observers have linked the dollar’s pullback against the yen to Abe adviser yesterday who suggested that JPY105 may be a more appropriate level than JPY120, given purchasing power parity measures.  However, we suspect that just as importantly, if not more so, is the realization, partly coming from recent comments from the BOJ Kuroda and the recent minutes, suggesting that contrary to expectations, the BOJ is in no hurry to add to its incredible pace of monetary base expansion.   We note that other senior Japanese officials have refrained from commenting on Hamada’s remarks, which seemed to specific to be consistent with the G7 agreements.  Moreover, not only are there numerous measures of PPP, but there is a large body of research that suggests that it is in an incomplete metric. 

The dollar has slipped to almost JPY119.55, down a full percentage point from yesterday’s high.  Last week’s low was near JPY119.45.  There are about $600 mln of JPY119.50 options set to roll-off today, according to reports.  Elsewhere the $1.05 level is thought to house $1 bln of optionality expiring today.   Barring a negative surprise on US retail sales, we look for the dollar to probe higher in North America.