Everyone’s Favourite Dollar

The ‘Big’ dollar is ending the week on a flier against the Yen, managing to print a nine month high, while against the EUR the market has completed a three-cent U-turn. Worries about an oil supply shock are pressuring both of the favored funding currencies. CPI data in Japan indicates that the country remains gripped by its nemesis, “deflation”. This has forced BoJ Governor Shirakawa again to stand firm and state that the Central Bank would keep monetary policy “ultra-loose” in its efforts to meet its inflation target. Bernanke’s no show hand on QE mid-week had some investors closing out their short dollar positions. Implementing a third round of QE would have weighed on the dollar.

Below are some other highlights of the week:

Americas

• USD: Pending home sales rises +2%, m/m, in January to 97, and up +8%, y/y. It is the highest level recorded in 21-months and suggests that the housing market might be turning a corner. The rise came on the back of easier mortgage lending, lower interest rates and improving labor markets.
• USD: US Durable goods orders posted the biggest drop in three-years mid-week (-4%) suggesting a sign of a still fragile economic recovery. However, it is important to note that new-orders had increased the three previous months, including solid gains of a +3.2% in December and +4.2% in November; this suggests that factories have a healthy backlog of orders that need to be filled, keeping product lines moving.
• USD: US Consumer confidence jumped in February, aided by a better assessment of the job situation. Confidence increased to 70.8 this month from a revised 61.5 in January. It’s the highest index print in a year. The present situation index rebounded to 45 from a revised 38.8 in January.
• USD: GDP report was stronger than we expected on three fronts: First, Q4 GDP was revised up by 0.2% to 3.0% rather than down to 2.6%. The second surprise was in the PCE price index. Q4 growth rate was pushed all the way up to +1.2% from +0.7%. This is still below the Fed’s target range, but makes the disinflation story a little less compelling. The third major surprise was in the Q3 personal income revisions, which were massively positive. The annual growth rate of nominal labor compensation was revised up by more than four-percent points. Analysts note that a swing of more than two and a half percentage points in real-disposable income growth in the third quarter, from -1.9% to +0.7%.
• Fed: Bernanke’s semi-annual report to Congress avoided any discussion of Fed asset-purchase plans in his prepared testimony. Bernanke’s text cited weak household income growth as being one of the fundamental factors restraining consumer spending, noting that real household income growth was flat in 2011. He indicated that inflation was moderate as the Fed anticipated in the second half of 2011 to a rate of 1.5% (close to its average pace in the preceding two-years).
• USD: Jobless claims dropped-2k to +351k last week. Even better was the four-week moving average falling to +354k (lowest level in four years). This is a healthier sign that US labor markets are improving.
• USD: Income (+0.5%) and spending (flat) came in less than expected, suggesting that consumers are still hesitant to buy in fully to a better economy.
• CAD: Canada’s current account deficit narrowed less than expected in Q4. The deficit shrank to -CAD$10.33B from a revised -CAD$12.32b.
• USD: The market was expecting a strong US ISM print (58), but were disappointed with it slipping to 52.4 from 54.1. Stronger global risk appetite has investors shrugging.
• CAD: GDP growth was a tad higher than expected (+0.4%, m/m). Q4 annualized increase matched consensus (+1.8%).

EUROPE Week in FX

ASIA Week in FX

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