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The dollar opens the last day of the trading month a mere 0.2% off the lows for the year on the main dollar index.   It would be safe to say there is a fragile calm around events in the Middle East. Oil prices are just shy of the $100pb level on the WTI contract and whilst stock markets have recovered slightly in Asia, this is from year lows for emerging Asia stocks towards the end of last week.

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For early on this week, the Aussie is the one to watch, as it pushes the upper end of the 0.99 to 1.02 range that has held in place for all of the month to date. However, the dollar weakness, during what has been a time of much geo-political uncertainty, is telling and investor flows today and tomorrow (around month end) should give us more clues as to their preferences for dollar alternatives, which were fairly robust in February.

Commentary

Ireland’s coalition talks begin. The election saw the ruling party (Fine Fail), which has dominated the political land for decades, roundly defeated, with the Fine Fael opposition now looking to secure the support of the Labour Party or selected independents in order to form a government.   What’s crucial here is that it are seeking not only to renegotiate the EU rescue deal, but also pressure senior bond-holders to take some of the pain of the required austerity. As such, we’re likely to hear more noise from Ireland in the coming weeks.

GDP revisions weigh on the pound. UK GDP for the final quarter, which initially revealed a 0.5% decline, has been revised down to a 0.6% fall. What this data shows is that the economy contracted on an underlying basis after four quarters of positive growth. Such a pattern is not necessarily that uncommon in the early stages of recovery. You see it after the early ’90s recession (where there was one dip back into negative territory) and also in the early ’80s. Quite often it’s associated with a rebound in inventories (the most volatile GDP component) coming to an end. There’s an element of this in these numbers, the change in inventories in Q4 very similar to that in Q3, with inventories having added to GDP in the previous four quarters. In summary, sterling is going to be watching every shred of data for clues on Q1 activity, simply because another quarter of negative underlying growth (i.e. snow aside) would bring back the ‘recession’ word, even if it were technically not true.

Eurozone consumers become more circumspect. The latest retail PMI report for the Eurozone confirms what is likely to become the norm over coming months, namely that consumers will become much more circumspect in response to the tightening in financial conditions/spike in oil prices experienced over recent months. The February reading for the Retail PMI of 49.9 was down 6 points from January’s level, with the French outcome dipping particularly sharply. The euro barely responded to the news.

Russia raises rates and reserve requirements. In a surprise move, Bank Rossii (Russia’ central bank) raised its main rate by 25bp on Friday to 8.0%, in response to growing inflation pressures. Separately, the central bank also lifted mandatory reserve requirements for liabilities to 4.5% from 3.5% for non-resident companies in an attempt to stem rising capital inflow on the back of higher oil prices. The Russian rouble has risen by 6.2% against the dollar this year, which makes it the best-performing currency in the world for the year to date.

Looking Ahead

Monday: FR: Producer Prices, January (expect 0.9% MoM and 5.6% YoY, previous 1.0% and 5.4%); EC: Eurozone CPI, January (expect -0.6% MoM and 2.4% YoY, previous 0.6% and 2.4%); US: Personal Income, January (expect 0.4%, previous 0.4%); Personal Spending, January (expect 0.4%, previous 0.4%); Chicago PMI, February (expect 67.9, previous 68.8); Milwaukee NAPM, February (previous 57); Pending Home Sales, January (expect -2.5%, previous 2.0%).

Tuesday: JPN: Jobless Rate, January (expect 4.9%, previous 4.9%); Job-to-applicant ration, January (expect 0.58, previous 0.57); UK: Nationwide House Prices, February (expect -0.2% MoM, previous -0.1%); 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

Simon Smith, Chief Economist

Michael Derks

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