Overview
The US dollar is losing ground against some but not all currencies, and as the smaller ones are leading many have not really registered the moves. Monday the Slovakian koruna was revalued against the Euro and it moved to a mere 24.585 to the dollar, its strongest ever; Tuesday the Australian dollar reached $0.8093, above pivotal resistance at $0.8000; likewise the Kiwi at $0.7159 a new high for this year. Thursday Canada (C$1.1530) and Cable ($1.9729) were dragged along by these and Wednesday??™s Euro move (see below). Equity indices rallied this week and have now recovered half or more of February??™s sudden losses, as they believe that were the Fed to ease sooner rather than later business would benefit. Commodities generally have a bid tone but are not racing away or grabbing headlines. ICE Brent futures at $63.67 (as Iran holds British Navy personnel) posted a new high this year; CBOT Oats at 296 cents per bushel matching the 1996 high and in turn about the most expensive in thirty years; NYMEX Cocoa at $1,919 per metric tonne, highest since June 2003. Interest rates held in tight ranges as many continue to ponder what is or is not needed in different countries.
Political and Economic Developments
The Fed left rates unchanged at 5.25% following Wednesday??™s FOMC meeting but altered their wording. ???Policy concern remains the risk that inflation will fail to moderate as expected. Future policy adjustments will depend on the evolution of the outlook both for inflation and economic growth??™. So far so enlightening, but the point was that they dropped their tightening bias. The usual knee-jerk reaction in the interest rate markets, yield curve steepening, and propelling the Euro to a new high for this year at $1.3412. The Yen did not budge on this at all, so Yen crosses edged higher and EUR/CHF is back at 1.6200. Slightly worrying UK figures as the Chancellor micro-manages the economy (cutting VAT on nicotine patches, for goodness sake!). February CPI +0.4% M/M and +2.8% Y/Y and although not used as the Bank of England??™s inflation target RPI up a huge +4.6% Y/Y, the highest it??™s been since August 1991. M4 Money Supply dropping to a ???mere??™ +12.8% Y/Y from a high at +14.4% last September, so no wonder Retail Sales are up at +4.9% Y/Y.
What to watch for next week
Sunday 25th Hong Kong??™s Chief Executive election and European clocks go forward one hour to Summer Time. Monday Bank of Japan Minutes of February??™s meeting and US February New Home Sales. From Tuesday March CPI for the different German states, Germany??™s IFO, UK BBA February Mortgages, and US March Consumer Confidence. Wednesday German April GfK Consumer Confidence, Eurozone February M3, UK final Q4 GDP, and US February Durable Goods Orders. Thursday early Japan??™s February Retail Trade and March Business Confidence, Germany??™s March Unemployed, UK February Consumer Credit and Money Supply, CBI March Distributive Trades Survey, US final Q4 GDP, and February Help Wanted Index. Friday a lot of figures starting with Japanese February Jobless, Household Spending and National CPI, Labour Cash Earnings and Overtime, Industrial Production plus March Tokyo CPI. Also German February Retail Sales, UK March GfK Consumer Confidence, February EZ13 Unemployment, CPI and Business Climate. Then US February Personal Income and Spending, Core PCE and Deflator, Construction Spending, March Chicago Purchasing Managers and final University of Michigan Confidence. Saturday March 31st is prophet Muhammad??™s birthday so holidays in many countries next weekend.
Positioning and Technical Analysis
We expect a quiet week of cautious moves and relatively small ranges. A sense of relief will probably permeate stock markets but we feel this is premature and another losing streak in April is a distinct possibility. Likewise interest rate markets, many of which are still holding at or close to fairly pivotal yields: 4.50% US Treasuries, 1.60% 10-year JGB??™s, and Brazilian dollar bonds at their lowest spreads ever over US ones. Sterling yields and the curve are in a world of their own and are unlikely to take their cue from others. FX markets will continue to dither between generalised US dollar weakness and key long term chart levels. Here there is a chance that smaller currencies will jump the gun and start racing away before April; major currencies would then have to catch-up. Watch the Yen crosses as having recovered very well from February??™s plunge many may assume the ???carry trade??™ is alive, well and easy. Not so and we are currently pencilling in another equally severe drop some time in April. Commodities should continue quietly underpinned.