The dollar’s falling down
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The dollar’s falling down

  • Sweden powers ahead
  • US consumers reluctant
  • A critical time for Aussie bulls
  • Fed’s Dudley sounding dovish

From many perspectives, it’s not been the easiest first couple of months in forex markets.   Emerging market equities hit their lows for the year towards the end of last week, whilst the dollar yesterday also hit a low for the year, at least on the dollar index. Meanwhile, those currencies that have performed the best are those where interest rates are rising, or are expected to rise. The Swedish krona was again pushing ahead yesterday, currently up over 6% vs. the dollar this year. Yesterday’s gains were on the back of indications that rates look likely to rise faster than previously thought, according to the latest Riksbank minutes.

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Meanwhile, the equity market is the only major market in Europe down over the past two months.   These factors build on themes we have talked about for some time now, namely the shift in asset flows from emerging to developed markets, together with the changing face of the risk trade.   The main risks to the weak dollar view are the UK and ECB holding back on implied tightening and the plethora of dollar shorts in the market choosing to cover some of their positioning.


Sweden powers ahead. It was difficult not to ignore the performance of the Swedish krona on Monday, not to mention for the year to date.   The currency is 1% firmer vs. the EUR in a generally weaker dollar environment, with the main factor being comments in the minutes of the policy meeting earlier this month, when rates were raised a further 25bp.   The governor, Ingves, said the chances of tightening rates at every meeting this year had risen and also hinted at larger moves.   The economy was impacted less by the banking crises than many others.   Nominal GDP has surpassed the 2008 peak, whilst adjusting for prices, it’s only just below the peak.

The other thing to note is that the Riksbank is more open in terms of directing the market on the likely course of monetary policy, something which it publishes in its inflation reports.   Rates are currently at 1.5% and the money market sees rates rising to near 3% by year end.   This would still be modestly accommodative by historical standards.   Meanwhile, the stock market is the only one of the European majors that is down on the year, but this is not an issue for the currency with the market not being a major place for international investors.

US consumer reluctant. January’s personal income and spending figures highlight the ongoing reluctance of US consumers. Last month, personal spending rose by just 0.2%, with the previous month revised lower to +0.5% from +0.7%. This was despite a 1% jump in personal income in the month, a result aided by some of the recent tax changes announced by the President.

US consumers remain in balance sheet-preservation mode, not surprising considering the parlous condition of the US labour market and the recent jump in petrol prices. As NY Fed President William Dudley suggested this Monday, the economic outlook may be considerably brighter than it was six months ago but this is no reason for the central bank to change its commitment to maintain low rates for an extended period. Fed Chairman Bernanke is likely to reiterate this message in his semi-annual monetary policy testimony to the Senate when he speaks later today.

A critical time for Aussie bulls. Although the Aussie has been essentially range-bound between 0.99 and 1.02 for the first couple of months of this year, it has nevertheless been a fascinating tug-of-war between the bulls and the bears. For those who remain positive on the Australian dollar, they would no doubt be cheered by the fact that it was again testing the 1.02 level on Monday. That said, 1.02 is representing something of a stumbling block for the Aussie – on no less than six occasions since November, this level has been tested, only for it to subsequently drop back each time. Encouragingly, the pullback on every occasion has been shallower than the previous one. In addition, on each pullback, the 100-day moving average has always been respected.

According to the latest CFTC data, traders remain very bullish on the Aussie. Given the continuing surge in base metal and precious metal prices, it is not surprising that the currency is still well-bid. However, the bears might observe that the Australian dollar has made virtually no progress at all since October despite booming commodities. Also, in the past there has often been a significant correction in the Aussie whenever traders have become this ‘long’. The bulls have been extremely patient and, in recent weeks, have generally not been shaken out whenever there was the hint of trouble. This tense stand-off between the bulls and the bears is likely to be resolved one way or the other very soon.

Fed’s Dudley sounding dovish ahead of Bernanke testimony. Also adding to the softer dollar month end tone were the seemingly dovish comments from FOMC vice-chair William Dudley.   He broadly welcomed the “stronger recovery with more rapid progress towards our dual mandate objectives” and was clear that this was not a reason to change course. Given his position in the Fed, it’s unlikely that these comments are going to be undermined by a notably more bullish tone from Bernanke later today.

Looking Ahead

Tuesday: UK: PMI Manufacturing, February (expect 61.5, previous 62.0); Net Consumer Credit, January (expect £0.2bn, previous £0.2bn); Mortgage Approvals, January (expect 42.9K, previous 42.6K); IT/FR/GER/EC: PMI Manufacturing, February (expect 57.6/55.3/62.6/59.0, previous 56.6/55.3/62.6/59.0); GER: Unemployment Rate, February (expect 7.4%, previous 7.4%); Unemployment Change, February (expect -13K, previous -13K); EC: Eurozone Unemployment Rate, January (expect 10.0%, previous 10.0%: CAN: BOC Rate Meeting (expect unchanged at 1.0%); US: ISM Manufacturing, February (expect 60.5, previous 60.8); Construction Spending, January (expect -0.5%, previous -2.5%); Vehicle Sales, February (expect 12.7m, previous 12.5m).

Wednesday: UK: PMI Construction, February (expect 53.0, previous 53.7); US: MBA Mortgage Applications; ADP Employment Change, February (expect 185K, previous 187K).

Thursday: UK: Hometrack Housing survey, February (previous -0.5% MoM); IT/FR/GER/EC: PMI Services, February (expect 51.2/60.8/59.5/57.2, previous 49.9/60.8/59.5/57.2); EC: Eurozone GDP, Q4 (expect 0.3% QoQ and 2.0% YoY, previous 0.3% and 2.0%); Eurozone Retail Sales, January (expect 0.3% MoM and 0.0% YoY, previous -0.6% and -0.9%); ECB Board Meeting (expect no change); US: Initial Claims (previous 391K); Bloomberg Consumer Comfort, February 27th (previous -39.2); ISM Non-Manufacturing, February (expect 59.7, previous 59.4).

Friday: US: Non-farm payrolls, February (expect 175K, previous 35K); Unemployment Rate, February (expect 9.1%, previous 9.0%); Factory Goods Orders, January (expect 2.2%, previous 0.2%).      

Source: Bloomberg

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