US Dollar Performance Mixed

The U.S. dollar is strengthening against the euro and yen, although movement in the currency market has remained muted. The euro continues its struggle to recover from last …

The U.S. dollar is strengthening against the euro and yen, although movement in the currency market has remained muted. The euro continues its struggle to recover from last week’s beating, although Spain is attracting attention as an underperformer. Other Eurozone members are calling for the country to make deeper cuts, and leadership there seems amenable to the recommendation. Meanwhile, investors are still fearful about Greece and consider it a bad bet. In the U.S. investors will eye the latest Federal Reserve announcement regarding the QE3, although no one expects a deviation from the agency’s plan to keep interest rates low through 2014. For more on this continue reading the following article from TheStreet.

The dollar is mixed against most major currencies, rising against the yen and the euro while falling against the Antipodeans currencies. With the exception of the yen, moves in foreign exchange market remain constrained to familiar ranges as investors seem to lack near-term conviction.

The euro was little changed following the ZEW survey, which was on balance positive with the expectations component coming in at 22.3, above its 10-year MA for the first time since July 2010. The euro is trying to recover from the breakdown at the end of last week but needs to resurface above the $1.3210 area to blunt some of the negative bias.

Eurozone spreads are mixed, with Spain the notable under-performer and the two-year yield up 10 basis points. Global stocks are mostly higher with the EuroStoxx 600 up 1.0% led by the nearly 2% rise in banking shares, while Asian shares and U.S. index futures also rose.

Spain remains in the spotlight. The European Union has asked Spain to make deeper budget cuts, calling on the nation to cut an additional 0.5 percentage points of GDP from the 2012 budget. This means that Spain would still be running a deficit equal to -5.3% of GDP, almost a full percentage point more than what was originally agreed to with the EU.

Indications from the Finance Ministry suggest this is acceptable to Spain and some additional savings will be delivered, but as the recession deepens, this issue will remain a sore point.

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Elsewhere, pricing of Greece’s new bonds shows investors are not convinced that the Greek drama is over. The new bonds maturing in 2023 to 2042 have price indications of 15 to 30 cents on the euro while Greece’s one-year yield hovers near 1,100%, which seems only understandable if one were to think that another default is likely in the next year. Ongoing uncertainty should limit euro upside near-term near 1.32 and keep markets on track to test the 1.2974 February low.

From the U.S.

February U.S. retail sales are due out today, with markets looking for 1.1% month over month (0.7% ex-autos). However, auto and chain store sales point to the risk of a stronger than expected gain. The headline figure may also be inflated by higher gasoline prices, but the market will likely focus on the core measure that excludes autos, gasoline and building materials used in GDP calculation.

Firm data lessens the chances of further QE from the Fed. The FOMC meets today and no action is expected. The Fed may tweak its assessment of the economy slightly, but the thrust of the statement will likely be the same as the previous one and there should be no change to its pledge to keep rates low through 2014. If Friday’s pattern holds true, strong US data would translate into a strong dollar.

The Bank of Japan Tuesday extended its Growth-Supporting Funding Facility by JPY2 trillion to JPY5.5 trillion. Yet of the increase, half will be dollar-denominated loans, drawing on its reserve holdings, and so seems largely currency neutral.

That said, the dollar held support near JPY81 and appears poised to move higher. Note that the two-year interest rate differential between the U.S. and Japan continues to edge higher and at 22 basis points now is the highest since last August.


Double bad news for Hungary Tuesday. As we had suspected, the EU looks likely to freeze nearly EUR 500 million in structural funds since Prime Minister Viktor Orban has failed to deliver on the budget numbers. With a lot of optimism already priced in for the prospect of Hungary getting an International Monetary Fund deal, there is plenty of scope for disappointment as talks have not even started.

On the data front, CPI came in higher than expected at 5.9% y/y in February. This poses a serious challenge for the central bank, which is faced with a slowing economy and rising inflation.

Taken together, we think the balance of risk has shifted to the downside for HUF. The 200-day moving average is just below 290 for EUR/HUF and will continue to provide strong support. We prefer to trade the pair from the long side.

This article was republished with permission from TheStreet.


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