Dollar Danger is to Trade Higher

Bernanke’s remarks this week on the US job market are being considered his most dovish stance to date. The reserve currency of choice chose to underperform, squeezing weaker shorts and managing to print a new medium EUR term high. Unless the market gets a sense that the Fed is contemplating another round of QE, then the dollar is not expected to weaken significantly from here. By stating that the problems troubling the job markets are ‘cyclical and not structural’ implies that policy stimulus can be effective at reducing the labor market slack. If however, the problems facing the US were structural in nature, then accommodative monetary policy would not necessarily be effective. Now that quarter and month end rebalancing has been completed, the market can get back to trading fundamentals. This week’s slew of global PMI’s could be setting the tone for the dollar a considerable period of time.

Below are some other highlights of the week:

Americas

• Fed: Bernanke’s comments on employment at the beginning of the week are being considered his most dovish to date. The market focused on his statement that improvements in the job market will require faster economic growth, “a process that can be supported by continued accommodative policies” to push the dollar to underperform outright. It’s this phrase that is very much open to interpretation. It could mean either a delay in their exit strategy of current policy or hiking the Fed’s fund target. The FI dealers could argue that policy makers are “not comfortable with the twist’s expiration at the end of June,” heightening speculation of introducing QE3. PIMCO says the Fed may hint at QE3 in April.
• USD: February pending home sales slip a small -0.5% vs. a +1% gain expected. Realtors point to “an elevated level of contract offers so far this year” to suggest existing home sales could be best performance in five-years. Still, other February data (starts and sales) also disappointed; housing recovery remains slow and uneven.
• USD: Dallas Fed manufacturing index dropped to 10.8 from 17.8 in February. Readings on demand fall sharply, as new orders index drops to -0.3% from 5.8 and growth rate of orders index contracts to -0.8 from 6.6. Area factories also report rising prices.
• USD: US House prices continue to tumble according to S&P’s Case-Shiller home-price indexes. US home prices dropped in January, with average prices dropping back to 2003 levels. The index dropped-0.8% from a month earlier, while on a year over year prices fell -3.9% in the 10 major markets. The 20-city index dropped -3.8%.
• Fed: Dudley’s (NY Fed) testimony, before the House Financial subcommittee on domestic monetary policy, informed leaders that the reduced rate to charge for dollar SWAPS has helped the availability of funds to consumers and firms as the European Union works through their challenges. He also stated that the Fed has not made any decisions on further interventions and that the SWAP lines probably enhance the dollar as a reserve currency.
• USD: March’s Consumer confidence came in close to expectations as US consumers remain confident about the economy and labor markets, but inflation worries jumped this month. The index fell to 70.2 on the month after jumping more than ten points in February to a revised 71.6, first reported as 70.8. The present situation index rose to 51 from a revised 46.4.
• USD: The Richmond Fed manufacturing and service sector surveys made for a sharp contrast in March, with the manufacturing composite index plunging from +20 to +7 and the services revenue index jumping from +6 to +26. The manufacturing headline was its weakest in three-months, whiles services revenue growth hit its fastest rate in five years.
• Fed: Bernanke said that the Great Depression was considerably more severe than the recent recession:-The Fed’s forceful policy response to the recent financial crisis and recession likely averted much worse outcomes.
• USD: Crude-oil futures have been hit by a surprise build in US oil inventories and the renewed potential for a strategic oil reserve release. Crude stocks rose by +7.1m barrels last week. The prospect of a release of strategic oil reserves from the US and some European nations have also being pressurizing oil.
• USD: Manufacturers orders for durable goods last month rose by +2.2% to a seasonally adjusted $211.7b. The market had been expecting a +3% rise. Orders dipped in January by a revised -3.6% from -3.7%. A key barometer for capital spending, orders for non-defense capital goods ex-aircraft climbed by +1.2% suggesting a degree of confidence in the recovery.
• USD: US weekly jobless claims fell -5k to +359k last week. However, there was a large revision to the previous week making a few head turns. Annual adjustments to seasonal factors caused the prior week to report a higher number (+364k vs. +348k). Perhaps US job market is not as hot as we had thought?
• USD: In the final estimate of the US economy this week the commerce department reported that the US economy expanded at its fastest rate in 18-months in Q4 of 2011. Despite being the strongest gain since Q2 in 2008, the market had been expecting a +3.2% growth rate.
• USD: Benign core-PCE (+0.1% vs. +0.2%) is an excuse for Fed to concentrate on employment
• US spending shot up by +0.8% last month, outstripping income growth of +0.2%. February’s numbers extend on January’s performance where revisions show that income rose +0.2% (+0.3%) and spending rose +0.4% (+0.2%).
• CAD: Canadian GDP expanded +0.1% in January as manufacturing output increased for the fifth consecutive month. Analysts had expected manufacturing to be a drag on growth as factory sales data for the month had shown a sharp drop in volumes. Year-onyear GDP growth slowed to +1.7% from +1.9%.

EUROPE Week in FX

ASIA Week in FX

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