Greenback Bounces, More Fed than Trump

The much-anticipated speech by US
President Trump was light on the details that investors interested in, like the
tax reform, infrastructure initiative, and deregulation.
  There
appears to be an agreement to repeal the national healthcare, but there is no
consensus on its replacement. 

The gains in the US dollar appear to be more a function of shifting
expectations of Fed policy than new clarity on fiscal policy.
  By
Bloomberg’s calculation, there is now an
82% chance the Fed hikes in two weeks.  Our interpolation puts the odds at
74%.  New York Fed President Dudley’s remark that an increase in rates has become “more compelling” was the
catalyst.  

Seven Fed officials are still set to speak this week.  Governor
Brainard speaks after the US markets close today.
  Although she is not
part of the Fed’s leadership core, her insight last year, and particularly the
importance of the international settings, was important.  On Friday, both
Fischer and Yellen speak.  Given the proximity of the March 15 FOMC
meeting, it would be the last significant opportunity to try to shape market
expectations.   

The US dollar is stronger against all the major currencies but the
Australian dollar.
  News that Australia’s economy expanded 1.1% in Q4
16, among the strongest quarterly performances in the past five years lent
support to the Aussie, which continues to encounters offers around $0.7700.
  It found bids near $0.7640, which need to be absorbed before it can test
the lower end of the recent range near
$0.7600.  

The story behind Australia’s recovery after the contraction in Q3 was a
dramatic (9.1%) improvement in the terms of
trade, due to the rise in iron ore and coal prices.
  This, in turn, seems to be a function of the
stabilization of the Chinese economy.  News earlier today showed that
Chinese manufacturing PMI is rising to
51.6 in February from 51.3 in January.  Output, new orders, and business expectations
improved.  The non-manufacturing PMI slipped to 54.2 from
54.6.  

The dollar briefly traded below JPY112 yesterday and now is trading near
JPY113.65.
   Japan did report stronger than expected Q4 capex (3.8% vs. 0.8% expectations), and record
corporate profits in Q4.  However,  the weight on the yen appears to
be emanating from the rate differentials, and in particular the rise in US
yields.  The 10-year premium to be garnered in the US over Japan stands
near 2.36% today.  It finished last week near 2.24%.   Yesterday, the dollar recorded a bullish hammer
candlestick pattern and the follow through buying today, has lifted the
greenback to test the JPY113.70 area, which corresponds to a 61.8% retracement
of the dollar’s slide from February 15’s test on JPY115 to yesterday’s low near
JPY111.70, near the lows seen in the first half of February.
The
JPY115.00 would be the next target if the JPY113.75 can be overcome.  

The February eurozone manufacturing
PMI ticked down from the flash (55.5) to 55.4, but it is still better than the
55.2 January reading and is the highest
since the time series began in early 2014. 
The minor lower revision
seems to stem from German where the flash manufacturing reading of 57.0 was revised to 56.8.  Separately, Germany
reported a somewhat larger than expected fall in unemployment (-14k rather than
-10k).  

European politics are also very much in the news today. 
Fillon’s campaign in France appears to be in trouble,
and there are reports suggesting that he may step down (though denied) and
replaced by rival Juppe.  In the
Netherlands, which goes to the polls in a fortnight, the Freedom Party has
slipped into second place according to the latest poll of polls, for the first
time since last November.  

The euro is finding little traction.  The euro stalled near
$1.0630 yesterday, as it did last week as well.  Since that high, the euro
has slid a full cent before finding support near $1.0525.   Two weeks
ago, the US premium over Germany on two-year money was less than 200 bp. 
It is now near 215 bp, a new extreme since the late 1990s.  We suspect
North American dealers will be reluctant to sell the euro without first
squeezing the intraday shorts established in the European morning.  The
$1.0560-$1.0580 may offer initial resistance now. 

The UK reported strong house prices and mortgage approvals, but the
February manufacturing PMI fell more than expected. 
The 54.6 reading
compares with the January reading of 55.7 (revised form 55.9) and the median
expectation on the Bloomberg survey for a 55.8 reading.  Yesterday was the
first time since January 20 that sterling
closed bel0w $1.24.  It has barely been able to trade above the old
support (now resistance) today.  Initial support is seen near $1.2345, which corresponds to a 50% retracment of the
rally from the January 16 dip below $1.20.  It is also last month’s low.
  A convincing break could spur a move toward $1.2260-$1.2300.  

The US economy calendar is chock-full
of economic reports, culminating with the Beige Book late in the session. 

Personal income and consumption data will impact Q1 GDP forecasts.  The core
PCE deflator is expected to be unchanged at 1.7%, though the risk appears on
the upside.  January construction spending could inform GDP
forecasts.  The ISM manufacturing report for February can also impact the
market and growth/inflation expectations.  

The Bank of Canada meets and is widely expected to keep rates
steady. 
The strengthening of the US economy is good for 
Canada.  The Canadian dollar is the weakest major currency over the past
five sessions, losing about 1.2%.  The greenback pushed above CAD1.33
yesterday for the first time in a month
and has seen mild follow through buying today.  The next important
technical area is CAD1.3360-CAD1.3390, which corresponds with the high for the
year and the 61.8% retracement objective of the down
move
from the high at the end of the year near CAD1.36.  

Disclaimer

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