Dollar Firms amid Position Adjustments

The election of Macron as French President has set off a bout of position
adjustment that has seen the euro push back into the $1.0850-$1.0950 range that
had confined activity for the two weeks between the first and second rounds of
the French presidential election.

The euro fell a cent yesterday after briefly poking through
Marginal new lows were scored
in the European morning,  Support is seen
in the $1.0850-$1.0875 area.  There are chunky option strikes that roll
off today at $1.0900-$1.0910 (665 mln
euros) and $1.0950 (657 mln euros).  

Germany reported trade and industrial production figures for March and
Italy reported retail sales.
  German industrial output fell 0.4% in
March, which is nearly half the decline that many economists expected after a sharp 2.2% increase in February, which was subsequently revised to 1.8%. 
Net-net, the year-over-year figure was nearly steady at 1.9% rather than the
revised 2.0% pace posted in February. 

The German trade surplus, as a source
of widespread criticism (EU, ECB, US)  jumped by a quarter in March to
25.4 bln euros from 20.0 in February. 
Export growth slowed to 0.4%
after a revised 0.9%.  Imports, which had fallen 1.6% in February rose
2.4% in March, which was more than expected.
   The German current account
jumped to a new record high of 30.2 bln euros (from 20.7 bln).  The
current account was flattered by what seems to be a seasonal increase in
primary income (investment income) and a small deficit on secondary income

Germany reports the first estimate of Q1 GDP at the end of the week
The economy appears to have accelerated in
Q1 to 0.6% from 0.4% in Q4 16.  Over the past four, eight, and 12
quarters, the Germany economy has averaged 0.4% growth.  

Italy’s retail sales disappointed.  They were flat in March
rather than increase by 0.2% as economists expected.  The contraction in
February was shaved from 0.3% to
0.2%.  Year-over-year, retail sales have fallen by 0.4%.  Italy
reports industrial output tomorrow and Q1 GDP early next week.  With the
French presidential election over, and Merkel’s CDU finding better footing in
state elections and national polls, the focus
of angst in Europe turns to Italy, where parliamentary elections are due next
year.  The Five-Star Movement is polling well, and is, for all practical
purposes running neck and neck with the PD, which recently saw Renzi re-elected

Separately, we note that Axel Weber, formerly of the Bundesbank, and the favorite to replace Trichet
at the helm of the ECB, until he quit over unorthodox monetary measures,
articulated an outlook that many expect. 
There will likely be some
modification of the ECB’s risk assessment and forward guidance as early as next
month.  A decision to taper the asset purchase program may be announced in September.  

The UK reported strong BRC like-for-like retail sales.  The 5.6%
year-over-year increase is the strongest
since 2006 when Easter again distorted the figures.  The Easter holiday
likely distorted the report.  However, below the surface, the divergence
between increased food sales (2.4% like-for-like)
and non-food retail sales (0.3%) may be a warning sign of problems

Sterling is pulling back after nearing $1.30 in the past two sessions. 
Initial support is seen in the
$!.2880-$1.2920 area.  Modest options (~GBP180 mln) struck at $1.2900 and
$1.2920 expire today.   At this juncture, only a break of the
$1.2750-$1.2800 would suggest a top is in place. 

The Australian dollar is the weakest of the major currencies. 
It is off about 0.7% to near $0.7320, new lows since the first half of
January.  It was initially sold in
response to disappointing retail sales.  March retail sales fell
0.1%.  The median guesstimate in the Bloomberg survey was for a 0.3%
increase after a 0.2% decline in February (revised from -0.1%).  It is the
third decline in the past four months.  In Q1, adjusted for inflation,
retail sales rose 0.1%, which represents a dramatic slowing from the 0.7%
(initially 0.9%) rise in Q4 16.  

The government’s budget news may have helped spur fresh sales. 
The government projects a larger than expected deficit.  The stimulus is
understood to take some pressure off the central bank’s monetary efforts. 
However, investors were already uneasy about the levy on banks that had been tipped.  The government will
introduce a tax of six basis points on banks with liabilities greater than A$10
bln.  This is expected to raise
A$6.2 bln in revenue.  The UK, Sweden, and Germany have similar

Meanwhile, the dollar continues to recover against the Japanese yen. 
There is a $800 mln option struck at JPY114 that will be cut today.  The dollar is up for the third day against the
yen and in the past 17 sessions, has only fallen four times.   Over
this period, the US 10-year premium has risen
by about 20 bp to 2.35%.    Adjustment on the crosses also seems to be playing an important role in the
yen’s weakness against the dollar.   Since April 17, the euro has
gained nearly 8.5% against the yen.  The JPY125 area is of technical
significance for the cross.  Above there, and the euro can rise toward

The minor gains eked out by the Dow
and NASDAQ failed to carry over to Asia. 
The MSCI Asia Pacific Index
was off 0.5% after reaching its best level since mid-2015 yesterday.  Note
that Korean markets are closed as the nation votes for president today. 
European equities are doing better.  The 0.5% gain by the Dow Jones Stoxx
600 is being led by materials, energy,
and real estate.  Only utilities are lower. 
Italian bank shares are up 1.4%.  It
is a sixth gain in the past seven
sessions, and an index of Italian bank shares are at its highest level since
last April.  Lastly, we note that the VIX fell to its lowest level since
1993 yesterday and will begin today’s session below 10%.  


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