The Dollar Gives Back More Before Consolidating

The US dollar’s pre-weekend pullback was extended in early European turnover but appeared to quickly run out of steam.  The prospect of a
constructive US employment report at the end of the week, especially given the steady decline in weekly initial jobless
claims to new cyclical lows, underscores the likelihood that the Fed hikes
rates next week.  Bloomberg puts the odds above 90%, while the CME
estimates a nearly 80% chance.  

The euro briefly pushed above the highs from late February near $1.0630
(and reached a high of $1.0640) before being sold back below $1.06.
There are two main European talking points today.  

First, there is some speculation that the ECB could change its forward
guidance this week. 
It has been saying that rates will remain at
present levels or lower “for an extended period
of time
” beyond the asset purchase program.   With headline
inflation throughout the area rising, and growth solid, there is some thought
that this guidance needs to be modified.  We
expected Draghi to forcefully push against this
Core inflation is flat in the trough and surge in inflation is likely to begin
unwinding in Q2, and the especially in H2, has last year’s recovery in energy
prices fall out of the base effect.   

Second, there were ideas that France’s Fillon would drop out of the presidential
contest, and perhaps replaced by Juppe, who would likely shoot into second
place behind Le Pen.
  However, Fillon is trying to hold on, while
Juppe made it clear he will not stand.  This
some new euro sales, which pushed the single currency back
below $1.06.   The $.10585 area is the 38.2% of the euro’s recovery
from last week’s dip below $1.05.  The 50% retracement is near $1.0565 and
the 61.8% retracement is $1.0650.  

The pullback in US Treasury yields, and especially with the 2.50% level
holding on a closing basis,  weaker Japanese shares, and North Korea’s
missile test helped support the Japanese yen. 
The dollar was sold to
a three-day low near JPY113.55, meeting the 38.2% retracement of gains since
JPY11.70 was tested on February 28. 
The 50-% retracement is near JPY113.25, which corresponds to the 20-day moving

Japanese shares traded heavily for the second consecutive session, but
the MSCI Asia Pacific Index resisted the drag and finished 0.4% higher.
Korean shares, which had also fallen at the open, recorded to close marginally
higher.  European shares are mostly lower as well, with the Dow Jones
Stoxx 600 off about 0.4% as well.  Energy, information technology, and materials are leading the

Core 10-year benchmark yields are mostly
softer, though peripheral yields and French yields are higher.
Premiums over Germany are widening at both the two- and 10-year tenors. 
Of note, the Netherlands, which goes to the polls next week, is seeing its yields
slip more in line with Germany than France.  The latest polls suggest that
the populist-nationalist party led by Wilders has lost some momentum in recent

There had been some speculation that UK Prime Minister May could trigger
Article 50 this week. 
However, need to reconcile the amendment passed
by the House of Lords with the House of Commons (so-called ping-pong) may see
at least a week delay.  Such a delay will keep the focus on the Hammond’s
budget at midweek.  Reports suggest he will seek a fiscal cushion to
absorb some dislocation caused by Brexit, but also that he will seek a balanced
budget over the next parliament.  

Sterling barely extended the pre-weekend recovery and was turned lower
near $1.23 which was the high since the
$1.24 support broke in the middle of last week. 
Last week’s low was
set near $1.2215 but is finding support above there today.  Sterling’s
late gains before the weekend snapped a five-day slide, during which time it
lost five cents.  

Although the interest rate differential between the US and Japan and
between the US and Germany are well tracked,
we note that the interest rate differential between the US and UK is also at
  The 10-year spread of nearly 130 bp is the widest since at
least the 1980s, and the two-year spread
of 120 bp is the largest since at least the early 1990s.  

Australia reported that January retail sales rose 0.4%, in line with
The RBA meets first thing Tuesday and is widely
expected to keep policy steady.  The trade-weighted index has risen 4-5%
this year, and the central bank would
like a weaker currency.  The sharp improvement in terms of trade (rising iron ore and coal prices) appear to largely run their course.  The
Australian dollar was sold through
$0.7600 last week for the first time since the end of January.  It snapped
back just before the weekend to test the old floor.  The gains were extended to $0.7610 before encountering
selling pressure.  Initial support is seen in the $0.7570 area now.  

The Canadian dollar recovered before the weekend to snap a four-day
  However, the US dollar remains firm and continues to straddle
the CAD1.34 area.   The greenback found a bid near CAD1.3365, a little
below the pre-weekend low.  

The North American session features the January factory orders and the final durable goods reports.  The
main focus this week is on the US jobs report with the ADP estimate on
Wednesday and the national report at the end of the week.  The early
estimate has crept up and now stands at 190k, according to the median in the
Bloomberg survey.   From a larger perspective, recall that the US
economy typically underperforms in Q1 and many economists are looking for a
soft report (though near trend growth, which Yellen confirmed may be a little
below 2% currently).  


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