Dollar Licking its Wounds as Week Winds Down

The US dollar is licking its wounds as the week winds down. It has been a poor week for the greenback, falling against all the major currencies. There are been two official impulses. First ECB officials have made it clear while it will explore unorthodox measures, should they be needed, such a decision is not imminent. Second, the FOMC minutes helped clarify the forward guidance and that an early hike is unlikely. The implied yield of the December 2015 Eurodollar futures contract has fallen 15 bp this week and is nearly 25 bp below pre-jobs data high point last Friday. 

What has changed in the foreign exchange market is the leadership. Recently it had been the dollar-bloc, and especially the Australian and New Zealand dollars. This week, the Swiss franc and (1.8%) and yen (1.7%) led the assault on the dollar. The New Zealand (0.9%) and the Canadian dollar (0.4%) were, with the Swedish krona (0.3%), where a rate cut in July looks increasingly likely, round out the three laggards. 

The strength of the yen and franc play may in part reflect the wind pocket into which equity markets have stumbled. Since last Friday’s high, the MSCI World Index (developed markets) is off 2.8% and is off about 0.5% today ahead of the US open. In contrast, the MSCI Emerging Market equity index is up a little more than 1% this week with today’s 0.8% decline, which breaks a five-day advancing streak. 

Pulled by the rally in US Treasuries and falling stock markets, Asian bonds rallied. However, European bonds have under some pressure amid what appears to largely profit-taking. Greece’s incredible bond auction, yesterday may also be injecting some caution. We note that the near euphoria is coming at the same time that the France and Italy appear to be pushing against the German-led austerity agenda. The EU elections may also result in stronger anti-austerity forces.

Earlier today, Fitch upgraded Portugal’s outlook to stable from negative and affirmed its BB+ rating. S&P, however, put Finland’s AAA status on negative outlook. Finland’s 10-year yield is up a single basis point today, while Portugal’s is up almost 3 bp. 

Separately, Moody’s cut Turkey’s outlook to negative from stable (Baa3 rating), citing external financing pressure and weak medium term growth prospects. Turkey’s 10-year lira bond yield is up 4 bp to 9.77% and the dollar bond yield is up 1 bp to 4.92%. 

The economic calendar today is light. There are three features from Asia. As seen in Japanese reports recently, the increase in measured prices is stabilizing. This was confirmed by the March corporate goods prices that were flat for a 1.7% year-over-year rise. This is down from 1.8% in February and 2.4% in January. This will likely keep expectations high for additional BOJ stimulus. We suspect, however, that if it will be forthcoming, it will be after the market consensus which is by the end of July. 

Second, China reported its March inflation figures,and they were in line with market expectations. Consumer prices rose 2.4% year-over-year from 2.0% in February, even though sequentially they fell 0.5% on the month. Inflation remains a food story in China. Non-food prices have risen 1.5% from a year ago, down from 1.6% in February. Food prices accelerated to 4.1% in March from a 2.7% year-over-year pace in February. Meanwhile, producer prices continue to fall. It has now been 25 months that China has reported a negative year-over-year producer price index (-2.3% in March from -2.0% in February. The yuan has been more stable this week and both the on and off-shore RMB were steady against the dollar this week. 

Third, India reported a March trade deficit of $10.51 bln. Exports and imports continue to contract a year-over-year basis, but at a slower pace, with imports recovering faster. Imports fell 2.1% year-over-year compared with a 17.1% compression in February. Exports fell 3.1% in March after a -3.7% pace in February. The rupee, along with the rupiah, are only actively traded Asian currencies that slipped this week (0.3% and 0.9% respectively). 

The North American session features March US PPI and the University of Michigan consumer confidence preliminary April reading. Neither are typically market movers. The LTRO paybacks will be announced and may be a bit less than recently given the next week’s Easter holiday. We note that EONIA remains elevated near 20 bp. It has not returned to where it was prior to the end of the first quarter, even though excess liquidity in the Eurosystem is near two-week highs. The ECB and BOE are expected to release their study on reviving the ABS market that may be of interest. That said it is hard to see how a QE program can be based solely, or even largely, on ABS in any reasonable timeframe.