March 31st, 2015 7:28 am | by John Jansen |

Via Marc Chandler at Brown Brothers Harriman:

Dollar Back on Top as Q1 Ends

– The US dollar is finishing the month as it began, with underlying strength
– The Fed’s leadership continues to point to a rate increase sometime in the June-September period
– The month-end, quarter-end, and fiscal year-end flows, ahead of the long Easter holiday, may be overwhelming the market’s reaction to economic data
– Turkish data out today was mixed

Price action: The dollar is broadly stronger against majors, but mixed against EM.  The euro broke below the $1.080 resistance level and is now trading around $1.0740.  Sterling is trading just below $1.4800, while the EUR/GBP cross continues to slide lower.  The yen is little changed, trading on both sides of ¥120.0.  The Norwegian krone is underperforming, its fourth consecutive session of substantial losses, with the dollar now at NOK 8.1200.  On the EM side, ZAR and the CEE currencies are underperforming, while INR and MYR are outperforming.  However, the EM moves have been moderate in comparison to those in the majors.  MSCI Asia Pacific fell for the fourth straight day, as the Nikkei and the Shanghai Composite were both around 1% lower.  This is the second down day for the Shanghai Composite in the last twenty days. Euro Stoxx 600 is down 0.2% near midday, while S&P futures are pointing to a lower open.


  • March may begin as a lion and end as lamb, but the US dollar is finishing the month as it began, with underlying strength.  The main exception is the Japanese yen, against which the dollar is flat, perhaps a reflection of the weaker Nikkei (-1%) and softer US shares.  The dollar’s firmer tone comes on the back of mixed US economic data.  Yesterday’s personal consumption expenditure data were soft, and some economists further revised down Q1 GDP toward 1.0%.  US consumers appear to have pulled back in January and February, after expanding consumption by a little more than 4% in Q4 14.  Poor weather also appears to have contributed.  
  • On the other hand, the solid rise in income (0.4%) saw savings rise to 5.8%, which can be expected to fuel future consumption.  A strong auto sales report tomorrow may drive the home the point that US consumer hiatus is brief.  The core CPI rate has surprised for two months to the upside, and the core PCE deflator also surprised to the upside.  At 1.4%, the core PCE deflator is essentially where it was (1.5%) in the middle of last year before the slide in oil prices.  
  • The Fed’s leadership continues to point to a rate increase sometime in the June-September period.  Despite downward revisions to its growth forecasts, Yellen has noted that it still anticipates above trend growth.  There is greater attention on the dollar’s rise from policy makers.  But judging from comments by several Fed officials, including Yellen and Fischer, it does not appear to be overshadowing other factors or that it has risen to a point that poses an obstacle to the beginning of the normalization of monetary policy.  
  • European economic news does not seem to have been the trigger for the euro’s slide, which is now amounting to about 3 cents in four sessions.  The euro staged a key reversal last Thursday.  It set a new high for the move just above $1.1050 and then proceeded to sell off and settled below last Wednesday’s low (~$1.09).  It opened this week in Asia near $1.09 and dropped below $1.0720 in the European morning.  Below here, support is seen near $1.0685, which corresponds to a 61.8% retracement of the euro’s bounce from the March 16 low near $1.0460.  
  • As expected, the eurozone flash CPI estimate for March ticked up to -0.1% from -0.3%.  However, the core rate slipped to 0.6% from 0.7%.  The euro area February unemployment was reported at 11.3% while the January series was revised to 11.4% from 11.2%.  This is in part mitigated by the stronger German March jobs report.  Unemployment queues fell 15k, a little more than expected, and this saw the unemployment rate fall to a new low of 6.4%.  
  • The month-end, quarter-end, and fiscal year-end flows, ahead of the long Easter holiday, may be overwhelming the market’s reaction to economic data.  Sterling is pinned near yesterday’s lows despite the unexpected upward revision to Q4 GDP on the third read.  GDP was revised up to 0.6% q/q and 3.0% y/y, despite a somewhat larger than expected current account deficit.  
  • Perhaps this data is too old to matter much.  The January index of services was considerably weaker than expected (-0.2% vs consensus of +0.3%), which raises questions over the pace of growth here in Q1 despite the more constructive PMI readings (note that the Markit/CIPS service PMI rose to 57.2 in January from 55.8 in December).  In addition, the election uncertainty (or is it certainty of a coalition government, or what is called a hung parliament?) is also taking a toll, which is evident in the price action and the volatility.  
  • The 0.5% rise in private sector credit extension in Australia, which lifted the year-over-year rate to 6.2% (a 6-year high) was not sufficient to offset the increasing speculation that the RBA will cut rates next week.  A nearly 80% chance appears discounted by the OIS market.  Last Tuesday, the Aussie was pushing toward $0.7940.  Today it is straddling the $0.7600 area.  Some observers are playing up the slide in iron ore prices to new ten-year lows,  but we tend to put more weight on the capital market developments than the goods markets, though we recognize that after a positive terms of trade shock, Australia (and other commodity producers) are wrestling with a negative terms of trade shock.  
  • This includes Canada.  It reports January GDP figures today, and a 0.2% contraction is expected.  This would bring the year-over-year pace down to 2.4% from 2.8%.  In four sessions, the US dollar has risen from CAD1.24 to CAD1.2750.  The multi-year high set earlier this month was near CAD1.2835.  During this period, oil has fallen about $5 a barrel.  At the same time, we expect sentiment to begin building for another rate cut, perhaps not next month but by the end of May (May 27th).  
  • Turkish data out today was mixed.  Q4 GDP was higher than expected, rising to 2.4% y/y against expectations for only 1.7%.  This means that full year 2014 growth was 2.9%, down from a revised 4.2% in 2013.  Much of the deceleration came from a fall in household spending, declining to 1.3% in 2014 from 5.1% in the previous year.  The February trade deficit, a less backward-looking data set, widened more than expected to -$4.66 bln.  Still, this is better than the 2014 February print of -$5.1 bln, showing some improvement in the country’s external accounts given the sluggish growth and falling commodity prices.  It’s important to note, however, that despite the recent weakness of the lira, the currency has experienced a significant appreciation on a real effective exchange rate (REER) basis.  This is noteworthy despite the lira having weakened over 20% against the dollar over the last twelve months.  This is because aside from much higher inflation than many of its trading partners, the currency has gained against the euro and the ruble over the period, the currencies of its two largest trading partners.
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