USD Snaps 3-Month Slide, Firm Ahead of Powell Part II

The US dollar rebounded last September and October before the downtrend
resumed in November, and lasted through January. 
The dollar gained
broadly last month, except against the yen, which rose almost 2.4% in
February.   This pattern is evident today, the first trading day of
March.  The dollar is extending its gains against most currencies but is
only managing to consolidate in a narrow range against the yen.  

The euro is testing the 38.2% retracement of the leg up that began in
last November.
  It is found near $1.2175.  A break of it would
likely encourage more liquidation ahead of the weekend’s political events (SPD
in Germany and Italian elections).   As the euro moves to levels not seen
in over a month, and given the political risk, it is not unexpected that
short-dated volatility continues to increase.  

One-week implied vol that that was a little below 7.3% at the end of last
week is near 10.8% now. 
The premium for one-week euro puts over calls
remains in the range seen earlier this week, which is the most since last
May.  There are two big option strikes that are maturing today. 
There is 1.2 bln euros struck at $1.2150 and 2.0 bln euros at $1.22. 

The small uptick in the final EMU February manufacturing PMI to 58.6 from
58.5 did practically nothing to help the euro, and dispel ideas that economic
momentum may have peaked at the end of last year. 
The manufacturing
PMI is a full index point below the January reading, and is the second
consecutive decline.  The ECB meets next week and Draghi often refers to
the sentiment indicators and seems to use them as leading indicators.  The
softer PMI readings may temper changes in the forward guidance, which is the

 Ahead of the election the Italian data will not make good
  Its manufacturing PMI fell to 56.8 from 59.0 and the
January unemployment rate ticked up to 11.1% from a revised 10.9% (from 10.8%)
in December.  In contrast, Spain’s manufacturing PMI unexpectedly rose to
56.0 from 55.2. This is just off the 56.1 peak last November.  German
manufacturing PMI was revised to 60.6 from the 60.3 flash reading.  It was
61.1 in January and averaged 62.1 in Q4 17.   The French
manufacturing PMI was revised to 55.9 from 56.1.  It was 58.4 in January
and averaged 57.5 in Q4 17.

After Nationwide reported that UK house prices rose 2.2% in February from
a year ago, down from 1 3.2% pace in January, the Markit PMI for manufacturing
held a pleasant surprise.
  It did not rise but it held in better than
expected at 55.2 down from 55.3.    Still, it is the third
consecutive decline and compares with the 56.9 average in Q4 17 and 55.9
average for all last year.   The December 2018 short-sterling futures implies
a 1.3% yield.  This is an eight basis point decline from the peak at the
start of the week, but sterling’s chief challenge stems from the US dollar’s
recovery and Brexit.  

May speech tomorrow may have lost some of its thunder after ten Tory MPs
reportedly will support an opposition amendment to a trade bill requiring the
UK to stay in a customs union with the EU. 
This is the exact opposite
of what the UK’s cabinet has supported.  The EU’s draft treaty was really
a worse case agreement, seemingly purposeful to provide additional
pressure.  As we have written about previously, the significance of the
Irish border issue should not be underestimated in the

Sterling closed below a trend line from the mid-November lows, and below
the 50-day moving average for the first in three months.
  It has not
been able to resurface above the trend line today (~$1.3175). Note that
the $1.3700 area houses the 50% retracement of sterling’s gains since those
mid-November lows.  A break of this area could target

Soft Australian data in the form of the manufacturing PMI (57.5 vs 58.7),
soft house prices, and most importantly disappointing Q4 17 capex, sent the
Australian dollar lower.
  Private capex fell 0.2%.  The market
had been looking an increase of around 1%.  Mining was especially weak and
not completely offset.   We noted yesterday that the Aussie was one of
three major currencies (CAD and SEK being the other two) there were below their
200-day moving averages.  With today’s drop, the Australian dollar has
punched through the 61.8% retracement of the rally that began in early
December.  That retracement is near $0.7745 and that may offer resistance

 The dollar is flat against the yen in narrow ranges, unable to
distance itself much from the JPY10.650 area.
  The dollar has not
closed above its 20-day moving average against the yen in nearly two
months.  It is found a little above JPY10.770 today.  There is a $508
mln option at JPY106.50 that expires today.  

The focus in the US is four-fold.  US stocks sold off hard late
yesterday and the S&P 500 may gap lower today.  We identified the
2690-2700 area is an important test.   A break of it could see
2630-2660.  The US personal income and consumption data are important data
points for the economy in their own right, and especially given the big
announcement of pay increases and bonus payments following the tax cuts. 
However, we are less sanguine and look for softer incomes and consumption in
January after 0.4% increase in both in December.  The Fed’s preferred
inflation measure, core PCE deflator, is expected to be unchanged at

The third focus in Fed Chair Powell’s second leg of his testimony. 
The prepared remarks are the same.  The questions are different. 
Many understood Powell to be more concerned about “overheating”
economy and have now priced in three hikes.  The odds of a fourth hike
have increased.    Investors will be keen to see if Powell says
anything to give the impression that he was misunderstood.  

Fourth, the US will reported announce the imposition of the tariffs on
steel and aluminum on national security grounds that have been discussed over
the past several months.
  While the aluminum foil and solar panel
actions and pending intellectual property defense, are arguable aimed at China,
the steel and aluminum are more broadly aimed.  The WTO does allow
protection of industries on national security grounds, but the area has not
been robustly tested.  There is little doubt the US action will see a WTO
challenge.    When the Commerce Department’s recommendation for
tariffs was formally issued, the relevant industries saw equity price
appreciation.  Note, however, that whatever higher prices result will be a
transfer from the consumers of steel and aluminum to the producers. 
Tariffs can also add to the upward pressure on prices. 


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