Highlights
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Groundhog Day consolidation continues |
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USD fighting back against European currencies |
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Equity volatility may be signaling a near-term top |
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BOJ MPC meeting unlikely to see rates changed |
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Commentary
Brian Dolan, Chief Currency Strategist
The dollar bounced back for most of last week, but its recovery already looks to be stalling before it ever really got going. The fundamentals don't appear to have played as great a role as market positioning did. Speculative EUR & GBP longs, in particular, were disappointed as rate hikes (BOE) and signals of impending rate hikes (ECB) were seen as a cue to take profit and sell. The FOMC statement was essentially unchanged and this reflects the ongoing policy holding-pattern of the US Fed. The fact that yields have backed up since the statement is more indicative of speculators covering bets on a near-term US rate cut than on any prospect of higher US rates. On the whole, we continue to hammer out a very choppy consolidation range in the major dollar pairs, and this looks set to continue. However, while the US dollar index remains above 82.00 (EUR/USD roughly below 1.3570) the bias is for further dollar-positive correction potential.
The one currency theme that appears to be still intact is selling JPY against anything else. The upcoming G7/8 meeting of finance ministers at the end of this week is unlikely to see the JPY singled out for concern, as both the US and Japan remain unwilling to support European efforts to reverse JPY weakness. At the same time, however, China's currency has begun strengthening again and has seen the USD/RMB rate fall below 7.000 for the first time since the end of the USD-peg in July 2005. With the Yuan strengthening, it's politically uncomfortable for the JPY to experience newfound weakness and this suggests further semi-official interest from the MOF to limit JPY weakness. The 120.50/60 level is the one to watch, with a daily close above it targeting fresh JPY weakness to the 122.00/20 prior highs in USD/JPY.
The BOJ MPC is meeting this week, and while no one expects a rate hike at this point, the speculative risk is that JPY shorts are stampeded out on rumors of potential BOJ changes. I continue to view pullbacks in USD/JPY and JPY-crosses as buying opportunities. But rather than staying with the positions for eternity, I'm also inclined to take profit on subsequent price gains toward recent highs, such as USD/JPY 120.50 and EUR/JPY 163.50/60. Only breaks and daily closes above those levels shift the focus unambiguously higher.
US data this week begins on Tuesday with April CPI, Empire manufacturing, TIC data, and the NAHB housing market index. Core CPI-ex-F&E is currently forecast to come in at +0.2% MoM, which is the pivot point for hawkish/dovish interest rate expectations; a reading of 0.2% would be seen as encouraging further steady US interest rates, which remains slightly on the hawkish side. Long-term TIC inflows, if they match the estimate of $73.2 bio would be nominally USD supportive. Wednesday sees April housing starts and building permits, which were most likely hampered by inclement weather, followed by April industrial production and capacity utilization, with IP expected to have bounced back after weakness in March. Thursday sees weekly jobless claims followed by the April's index of leading economic indicators and the Philadelphia Fed index. The only data scheduled for Friday is the preliminary May Univ. of Michigan consumer confidence, currently forecast to dip to 86.5 from April's 87.1.
On Tuesday, Eurozone data sees preliminary 1Q French, German, and Eurozone GDP estimates, with most estimates expecting a moderation of growth vs. 4Q, but still around 2% annualized. Wednesday sees German and Eurozone April CPI, which is also expected to show moderation relative to March. Thursday has no significant data. Friday sees only German April PPI and Italian March industrial production.
The BOJ MPC begins meeting on Wednesday and is expected to announce a steady decision on early Thursday afternoon Tokyo time. Data on Wednesday includes final March industrial production, April consumer confidence, and preliminary 1Q GDP, which is expected to see a significant slowing vs. 4Q GDP. Thursday sees the BOJ rate decision and BOJ Gov. Fukui's post-MPC press conference. Friday morning sees the March Tertiary Industry Index followed in the afternoon by final March Leading Economic Index and April department store sales.
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