The Now Assumed Above Board Forex Situation

The US dollar had begun the week on a firm note, but those gains happen to be trimmed in the second half of the week.  The confirmation that a 06 hike was highly not likely coupled with some softer US data took a cost.  The UK's surprisingly powerful retail sales report raised sterling.  The greenback had tested the upper end of its variety against the yen, nearing JPY121.50 but it ran into profit taking as US yields melted. 

There are three developments to notice today.  First, after reducing its GDP forecasts as well as delaying when the inflation focus on will be reached, at the conclusion of its meeting today, the BOJ improved its assessment of the economic climate.  The precise significance of this might be elusive, but it does appear to confirm that ideas that the BOJ was going to soon expand its QE procedures are premature.  Many experts are pushing that expectation into the second half of the financial year.  Initial support for that dollar is seen in the JPY120.Fifty area.  A break could signal losses toward JPY119.80 in to early next week. 

Separately, as we had previously discussed, yesterday Japan's Prime Minister Abe did commit to $110 bln new local infrastructure spending over the subsequent five years.  This needs to understood in the context of China's AIIB (initially thought to be capitalized with $50 bln has apparently already been increased to $100 bln).  Although many experts often speak about a race to the bottom, the rivalry over developments funds appears more to be a race to the peak.  

Second, Germany's IFO survey was a little better than expected, but still lower from April.  The overall business climate slipped to 108.5 from 108.6.  The consensus was with regard to 108.3.  This was powered by the expectations component that reduced for the second consecutive month.  Still the 103.0 study is still fairly elevated as well as above the Q1 average.  The assessment of current conditions checked up to 114.3 from 114.Zero.  It is the highest reading because last June.   We suggest the take-away from the IFO is that there is a feeling that Germany is near a peak.  That while things are great, it is hard to envisage things getting better. 

Separately, Germany confirmed Q1 GDP at 0.6%, but the details and revisions for Q4 had been somewhat surprising.  Consumption was in line with expectations from 0.6%.  Q4 was revised to 0.7% from 0.8%.  Government spending was 0.7% within Q1.  The consensus was for a 0.2% gain.  Q4 was revised to 0.3% from Zero.2%.  Capital investment rose 1.5%, which was twice the consensus expectation. However, Q4 capex was cut to 0.8% from 1.2%.  Domestic demand came in at 0.5%, the 0.7% the consensus forecast, but Q4 had been revised sharply higher to at least one.1% from 0.5%.  Exports were stronger than expected, growing 0.8% instead of the 0.5%.  Export growth in Q4 was revised to 1.0% through 1.3%. Lastly, imports rose through 1.5%, a touch less than expected.  Q4 import growth was modified to 1.9% from 1.0%.

The dinar tested the previous breakout area (~$1.1060) in the middle of the week.  Since it kept, the euro has been sneaking higher.  It is now testing the actual $1.1200 resistance area, which extends to $1.1220.  A move above there would encourage a push in order to $1.13.  For its part, sterling is consolidating yesterday's sharp gains.  It is holding in a narrow range (a little more than half a cent) near yesterday's levels. 

Third, once again Greek optimism offers hit a wall.  Greek Prime Minister Tsipras was hopeful that a political breakthrough was at hands.  French President Hollande also appeared cautiously optimistic that a special Euro group meeting would be held to discuss the progress.  However, Merkel seemed to play down through emphasizing that greater work is needed and that there is "a great deal to do."  One of the obstacles which have emerged over the past week or so may be the conflicting demands of the European union and IMF.  Germany, which was not really keen on the IMF's participation initially, now says no offer is possible without the IMF. 

As we have noted before, everyone seems to be cognizant of the moral hazards of the debtor, if concessions are made, but very few are considering the moral hazard of the loan companies.  The IMF overrode its own rules on lending to Greece, over the objections of some of its senior staff.  Back in 2010-2011, before the EFSF and ESM, countries in EMU had been so fearful of the impact of the Greek default on their own banking institutions that they lent money to Greece, not for Greece'utes sake or based on its ability to repay, but as a way to support their local institutions.  

In any kind of event, the developments within Riga sent Greek bonds reduce after gaining earlier this 7 days. The 23 bp rise in 10-year yields puts them upward 13 bp on the week.  On the other hand, Greek stocks are up about 0.5% for a 4.7% rise on the 7 days, which is one of the stronger performances in Europe this week. 

Turning to the North American session, the US reviews April CPI and Yellen speaks on the economy. The Fed's Seat will not be entertaining questions, as well as her economic views appear to be clear.  The headwinds on the All of us economy are largely transitory which stronger growth is expected. The actual bar to a hike is actually continued improvement in the work market (note that the 4-week typical of initial jobless claims slipped to new cyclical lows this week) and "reasonable confidence" that inflation will move towards the 2% target in the medium term.  In March, all but 2 Fed officials (governors and regional presidents) expect lift off this year.  Note that US savings flower $125 bln in Q1.  This coupled with income associated with job growth is anticipated to provide the fuel for consumption in the period ahead. 

That stated, today's CPI figures might go slightly in the wrong direction.  The consensus expects the year-over-year headline pace to ease in order to -0.2% from -0.1% and the core rate to 1.7% from 1.8%. The actual core CPI runs a bit higher than does the core PCE deflator. The primary PCE deflator was 1.3% in March. The April report is due out June 1. 

Canada reviews April CPI and March retail sales.  Deflationary winds are not the problem for Canada that they are for a lot of other major economies.  Canada's headline inflation may relieve to 1.0% from 1.2%, as the core is expected to hold steady at 2.4%. 

March retail product sales, are expected to slow after the heady 1.7% rise in February.  The consensus expects a Zero.3% rise on the headline and 0.4% excluding autos.  We think that the risk is on the downside.  The impact on the Canada dollar may be limited.  The united states dollar recorded a range of CAD1.2130 to CAD1.2250 on Tuesday and has been in that range since then.  When the break does come, we are more inclined to expect it on the upside for the US dollar.

Dollar Heavy into the Weekend is republished along with permission from Marc to Market