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Dollar Consolidates After Big Week

Marc To Market's picture





 

The North American market will put the finishing touches on what has been a generally constructive week for the US dollar. Ironically, the one notable currency that it slipped against is the Japanese yen.  Many had come away from the G20 meeting thinking it gave a green light to sell the yen.

We read the G20 statement a bit differently. We did not see a significant change from the G7 statement earlier and the draft of the G20 statement. Japanese officials have already moved back into compliance with the general rules of foreign exchange engagement as they have evolved since the Plaza and Louvre Agreements by refraining from offering bilateral targets. Under the rules, countries are indeed allowed to use monetary and fiscal policy to pursue domestic goals.

For the better part of three weeks now, the dollar-yen rate has been in a range. The 20-day moving average, which has supported the dollar since the mid-Nov election announcement in Japan has been successfully tested again yesterday and earlier today, coming in just below JPY93.00. Local press reports suggest that Japanese exporters are reviewing their internal budget rates and are revising from JPY75-80 to JPY85-90.

There have been several notable developments in Europe.  The most important is that the European banks are prepaying a much smaller than expected amount of the second LTRO than anticipated.  Banks are returning 61.1 bln euros next week.  Surveys found consensus expectations near 125 bln euros.  This means that the passive tightening in the euro area financial conditions is not as great as the market had discounted and the euro returned to yesterday's lows. Euribor rates have eased a few basis points and the 2-year interest rate differential between the US and Germany, which we argue continues to track the euro-dollar exchange rate has move more in the US favor.  At eleven basis points it is the most since mid-Jan.

The German IFO sentiment survey was stronger than expected, though perfectly consistent with other surveys, like the ZEW and PMI which show Europe's largest economy is recovering after a dismal Q4 when it contracted by 0.6%.  

The EC revised its forecasts and now see the euro zone contracting by 0.3% this year.  Of particular interest, France's forecast was cut to 0 from 0.4%.  This will add pressure on the government to slash its 0.8% forecast.  The key is whether it is given another year to meet its deficit target, as it seems to want or whether Germany, Austria, Slovakia and Finland's arguments that it would undermine the EMU's credibility if it did not make the 3% target this year. 

The other country that is on the edge is Spain.  The EC calculation show Spain  having run a budget deficit of 10.2% last year, the most in three years.  It projects a deficit this year of 6.7%, which seems a Herculean task.  There has been some suggestion that Spain could be given more time to reach its deficit targets, but given the lack of progress last year and some backtracking this year,  it too may undermine credibility. 

The uncertainty surrounding the weekend Italian election may have lent Spanish bonds some support (they have fared better than Italy's for example in recent weeks), but pressure may return after the political uncertainty in Italy eases, even if it take a bit more time.  Although there is an official poll ban, the informal ones show the center-left PD (Bersani) recovering from some recent slippage, Berlusconi's right coalition largely flat.  Monti, who in the run-up to the vote has been critical of the PD, appears to be slipping. Grillo's protest movement is holding its own, though below 20%.   Meanwhile, the graft scandal in Spain sees the King Carlos son-in-law and palace guard testify today.

The Reserve Bank of Australia's minutes were not as dovish as the market had anticipated and Governor Stevens' comments earlier today along similar lines.  The take away is that the RBA is content in a wait and see mode, which means that, barring any significant surprises,  a rate cut in March and April seems unlikely.  

The April 24 release of Q1 CPI may be the most important data point for a Q2 rate cut. Regarding the Australian dollar itself, Stevens acknowledged it was over-valued, but not hugely, and was surprised it was not lower.  The tenor differed by the RBNZ which had a greater sense of the over-valuation of the Kiwi and brandished its intervention option.  Further afield, note that Stevens' term expires shortly after the Sept 17 election.

The Aussie has fallen four cents over the past four weeks.  It appears to have found a near-term bottom--and a double one at that in the $1.0220 area.  The key now is the $1.0370-5 area.   A move above there would confirm the double bottom and signal scope for another 1.0-1.5 cent recovery. 

 


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Fri, 02/22/2013 - 12:22 | Link to Comment Albertarocks
Albertarocks's picture

"We did not see a significant change from the G7 statement earlier and the draft of the G20 statement. Japanese officials have already moved back into compliance with the general rules of foreign exchange engagement as they have evolved since the Plaza and Louvre Agreements by refraining from offering bilateral targets. Under the rules, countries are indeed allowed to use monetary and fiscal policy to pursue domestic goals."

In other words it's fine to set bilateral targets as long as you don't talk about them.  It's a bit of a farce that they try to make believe there is no currency war going on when it is in fact going on everywhere we look.  It's just that they all pretend it isn't happening while at the same time every single player in that game knows full well that it 'is' happening and knows that every other player is aware that it is happening.  The only rule seems to be "as long as you don't say it out loud you may proceed".  Japan is going to preceed no matter what anybody says because they literally have no choice.  The other members of the G20 even acknowledged as much when they more or less gave Japan the green light.  What choice do they have?  None!

So we just continue to watch our charts... the rest is nothing but noise.

Fri, 02/22/2013 - 10:57 | Link to Comment MFLTucson
MFLTucson's picture

The prettiest Pig in the pen will get crushed in time too.  It is not immune from the damage done by the printing press.

Fri, 02/22/2013 - 10:19 | Link to Comment Orly
Orly's picture

I am concerned about the quality of the rally in AUDUSD.  The pair quanted higher on the back of statements from the RBA's Stevens but the follow-up was lackluster at best.

Good Chinese data also pushed the pair higher but, again, the follow-through was decidedly unenthusiastic.

It has been hanging out at the Weekly Pivot area of ~ 1.0304 and seems drawn to that level.  Without a major catalyst to push it higher and small-money/retail traders taking the bait, it seems that this nascent rally could be short-lived.

A break below the Weekly pivot will likely send the Aussie back to the Fib-level at ~1.027, where it can try to find some consolidated strength.  A sustained break below that level could send the pair much, much lower; perhaps to as low as 0.969, matching the lows of November 2011...but watch for support at the 1.024 level.

The uncertainty in Italy is certainly not helping, as fear of a chain reaction from Europe to China to Australia could put weakness into the supply line.

:D

Fri, 02/22/2013 - 08:34 | Link to Comment disabledvet
disabledvet's picture

my personal view is that "the dollar is THE financial story...now and going forward the rest of the year." always good to have a currency guy on board as without a doubt the dollar will be very strong all year and "such an unusual condition has LARGE implications." for example "a strong dollar DEFINITELY green lights asset purchases by the Fed." that's a nice way of saying "the Fed by itself can overlay an entirely different economy from the one we have currently" although it still remains unclear whether such a creation...a true "new" economy...can in fact grow the existing one. count me skeptical.

Fri, 02/22/2013 - 15:02 | Link to Comment Ying-Yang
Ying-Yang's picture

DV.. well said, I agree.

Fri, 02/22/2013 - 08:03 | Link to Comment Edward Fiatski
Edward Fiatski's picture

Good recap as always, Marc.

Market awaited with bated breath on German GDP data and didn't react much, since it was completely in line with expectations. With the ugly LTRO2 repayments, we're currently swimming near the .764 fib at 1.3264-70, though I think there won't be any more price action this afternoon.

We'll see what happens, once NY opens.

P.S. Lovin' the daily & weekly candlesticks if it closes where it sits. Public Bunga-Bunga in Italy on the weekend - the waiting will be a bitch. :)

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