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The early optimism financial markets exhibited yesterday quickly dissipated as the day wore on, with the wash-out escalating into the close as investors looked to pare back their exposure to equities, causing the S&P to shed 0.7% on the day.   Whether market participants were skeptical about the implications of another relatively expensive Facebook acquisition and if the exuberant spending raised concern the market could be topping out, or the less than rosy durable goods data from earlier in the session finally worked its way through the market’s psyche, safety was in vogue, with the Japanese Yen strengthening to push USDJPY to probe the waters south of the 102 level.   Despite a lack of domestic data and a risk-off day in equities, the Loonie was well bid throughout the day, as the consolidation in USDCAD from last week’s high continues and a breakdown in technical positioning led to some further CAD short covering to help USDCAD attack the 1.1100 handle.   With yesterday’s close, momentum studies are favouring further weakness for USDCAD as the pair closes below its 20-day moving average, although the 50-day moving average has held the uptrend for USDCAD since last October, and will be a key support level in the high-1.10s, most likely determining whether the pair can move lower from its current levels.

Global sentiment reversed during the overnight Asian session, as more chatter from the Bank of Japan suggests that further stimulus is in the cards near the end of Q2 to try and help cushion some of the blow from the tax hike that is set to be implemented on April 1st.   The BoJ will likely try shy away from telegraphing what is expected as an eventual move, favouring the surprise approach to release big announcements, getting more so-called “bang-for-your-buck” from the markets.   That being said, the hints that have been dropped over the last few days helped USDJPY recover from its overnight lows, back into the low-102s before the North American open; the upward surge in USDJPY also aided Japanese equities, with the Nikkei posting a gain of 1.01% on the session.

The positive shift seen in Asia has failed to translate over to European trade, with the major bourses sinking into negative territory ahead of the North American hand-off.   The storm-clouds forming on the horizon for the Eurozone aren’t showing any signs of dissipating, as M3 Money Supply and Private Loan Growth failed to exhibit any meaningful pickup in growth.   The measure of currency in circulation grew by 1.3% on an annualized basis, right in line with estimates, while loans to businesses and consumers dropped by 2.2% compare to the last twelve months, a faster deterioration than had been expected.   The ECB will have further price data to digest before their meeting next week, with German CPI data on the docket for  Friday, and the flash estimate of CPI for the overall zone in March to be released  Monday  morning.   Analysts are expecting consumer prices in Germany to remain subdued  tomorrow, only showing a y/o/y increase of 1.1%, which wouldn’t bode well for the inflation picture in the rest of the currency-bloc, potentially raising speculation the ECB may be required to act sooner rather than later.   Also note, Draghi’s comments from this week by no means make action from the ECB a done deal (as Draghi quite often uses language as a policy tool) and that if the ECB chooses to keep policy measures unchanged, we will likely see some short-covering in the EUR.   Ahead of the opening bell in North America, the EUR is trading with a slight weight again, changing hands in the mid-1.37s against the USD after the disappointing private loan growth data and stronger retail sales out of the UK have driven macro-EUR sales.

Expanding on the aforementioned UK retail sales numbers, the primary gauge of consumer spending jumped by 1.7% in the month of February, reversing the majority of January’s 2.0% drawdown.   The better than expected numbers illustrate consumers at the retail level are continuing to gain confidence in the future, increasing spending levels as a hot housing market and strong employment pad consumers pocketbooks.   Some of the optimism should be tempered by the fact that incomes have not increased with the same magnitude as spending, putting savings levels on an unsustainable path should the trend continue.   The Pound is up 0.3% against the big dollar today, vaulting above the 1.66 level on the robust retail sales numbers.

Before the opening bell in North America, equity futures are experiencing some chop after ascending higher in overnight trade, but are set to open in the green after the bell is rung.   Front-month WTI is up just shy of 1% and trying to re-take the $101/barrel level this morning, while Copper also has its eyes set on the $3 handle, with the strength demonstrated from the commodity complex keeping USDCAD pivoting around the 1.1100 handle, despite strength in the DXY that has pushed the dollar index up 0.13% this morning.

Looking ahead for the remainder of the session, houses in the US under contract to be sold are due out at  10:00EST, and forecast to show no change over the month of February.   A more robust number than expected would help recover some of the negative connotation towards the housing market since the new home sales data earlier in the week, reinforcing the Fed timeline for when rates could potential rise after their asset purchases have been wound down.

Philly Fed President, and FOMC voting member this year, Charles Plosser has been on the interview circuit recently, essentially echoing Janet Yellen’s forecasts that it would be about six months after QE has been wound down until the central bank’s interest rate beings to rise.   Plosser also confirmed that he is estimating rates by the end of 2015 and 2016 to be higher than most of his colleagues, and that the Fed’s asset purchase program would be wound down by this fall.   The amount of pressure applied to the QE brakes could still be up in the air, and  tomorrow  will give a good indication as to if inflation is starting to improve in a constructive manner, potentially giving the hawks on the FOMC a little bit more firepower in regards to the tightening of monetary policy.   The Fed’s preferred measure of inflation, the PCE index is set to be released at  8:30EST on Friday, with a slight increase in the core reading of a 0.1% gain on a m/o/m basis for February.   Plosser’s hawkish reinforcement of the Yellen’s policy stance has done little to aid the USD, with the DXY languishing around the 80 handle; however, a strong PCE reading  on Friday  would help the dollar index continue upwards after the consolidation that is currently underway.

Further reading:

Is this the end of the carry trade?

US jobless claims 311K, Final Q4 2013 GDP growth 2.6% – USD stronger