Dollar is Little Changed, US Leadership Awaited

The foreign exchange market is unusually calm.  The US dollar is little changed against currencies.  While the selling pressure that took sterling below $1.39 and the euro below $1.10 has subsided, neither has been able sustain upticks.  The euro rose to $1.1040 before sellers re-emerged. Sterling was capped near $1.3965. 

The dollar had slipped to almost JPY111.00 yesterday, coming within five ticks of the February 11 low, before rebounding with the recovery in US stocks and advance in US yields.  The greenback's gain faltered near JPY112.65. 

There does not appear to be any catalyst for the reversal in the US afternoon yesterday.   The S&P 500 closed a couple of the gaps that had been created in recent days, and reversal higher negated some of the technical weakness.  There is a gap still unfilled.  It was from the higher opening on February 16.  That gap is found roughly between 1864.80 and 1871.45.  Although US shares are trading lower in Europe, the focus returns to the key 1945 area.  A close above there would lift the tone further.  

US shares helped lift most Asian bourses.  Japan's equities were up the most, with the Nikkei gaining 1.4%.   Of note, Chinese shares fell and fell hard, with the Shanghai Composite off 6.4% and the Shenzhen Composite down 7.3%.  However, the contagion was minor.  That alone is noteworthy. Reports blamed tighter liquidity conditions and the "normalization" of reserve requirements, removing the preferential treatment some banks enjoyed for the largest drop in more than a month.   

For its part, the yuan (on and offshore) has weakened a little but is broadly stable compared with earlier this year, and the spread between the two remains tight.   After a rough start, the PBOC has stabilized its FX regime, but as today's slide in equities show, the system remains fragile.  However, for global investors, what happens in Shanghai and Shenzhen stays there, and that is a healthy and desired development.  

Australia reported stronger than expected Q4 15 capex.  It rose 0.8% while the Bloomberg consensus was for a 3% decline.  The Q3 estimate was revised to -8.4% from -9.2%.  While local stocks managed to eke out a marginal gain, the currency has a heavier tone, within yesterday's ranges. Still over the past five sessions, the Aussie, like the other two dollar-bloc currencies are firmer against the dollar.  

The eurozone reported better money supply and lending figures, but the January CPI was revised lower.  M3 growth accelerated to 5.0% from 4.7% in December, and this was a little better than expected.  Lending to non-financial businesses rose to 0.6% (year-over-year) from 0.1% in December.  Lending growth to households was stable at 1.4%.  

While the change is in the right direction, ECB officials advocating more action next month will find little consolation in the lending data.   Instead, the revision in January's preliminary CPI to 0.3% from 0.4% suggests the mandate remains as elusive as ever.  Remember that the minor staff forecast revisions in December was a blow to those like Draghi pushing for bolder action.  The decline in oil prices and the downward revisions to world growth, coupled with the tightening of financial conditions will likely compel the staff to cut its forecasts again.   

While Brexit debate continues, investors were momentarily distracted by the Q4 GDP report. Due to subsequent data, there had been a risk of a downward revision in the initial estimate of 0.5%.  This risk did not materialize.  Instead, investors took a quick look at the details of the report that were made available for the first time.  Simply summarized, the details point to domestic-led growth, with net exports shaving 0.4% off GDP.  Consumer spending rose 0.7% and government spending rose 0.5%.  Business investment crashed 2.1%, the latest drop in two years. 

The key to the North American session is unlikely to be found in either the weekly jobless claims or even the January durable goods order report.  The driver will be how much of yesterday's reversal in the S&P 500 can be sustained.  Was yesterday's recovery a fluke?  That said, as will likely be confirmed tomorrow, the US economy stagnated in Q4 15 (the 0.7% annualized rise is at risk of being nearly halved in tomorrow's revision), but is reaccelerating in Q1 16.  Consistent with this is expected to be firmer durable goods orders.  In particular, nondefense orders excluding aircraft are forecast to snap a two-month decline. 

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