Dollar-Bloc Stays Bid, Euro And Yen In Well-Worn Ranges

Sterling and the dollar-bloc currencies are firm, but the euro and yen remain confined to well-worn ranges. The US dollar is vulnerable to poor economic news in the form of a negative year-over-year CPI print, especially given that Fed hike expectations have not been rebuilt in response to Yellen’s testimony.  

We understand her testimony to having indicated that barring a significant surprise the FOMC statement next month will drop the forward guidance of “patience”.  We do not think that this will lead to an April rate hike, but continued labor market improvement will set the stage for a June hike. That said, of course, we recognize that the Fed waits a bit longer, as they did with the tapering.  From a long-term investor vantage point, a June or September hike may not be a significant difference. 

While headline CPI may be negative, the core rate is stickier and is expected to be unchanged at 1.6%. Yellen was clear in her testimony.  Headline inflation is weighed down by the fall in energy prices, and this is spilling over into the core rate. This seemed to be a clear signal that soft inflation will not prevent the first rate hike. 

Separately the US reports durable goods orders and weekly initial jobless claims. Durable goods orders are expected to bounce back after a weak December report. The consensus calls for a 1.6% increase after a 3.4% decline. The internals are also expected to have improved. Weekly jobless claims have been trending lower. As of last week, the four-week moving average stood at 283k, the lowest since last October. Next week’s national number are of more significant for investors, but the weekly initial jobless claims have fallen between the January survey week and the February survey week. 

There are four major central bank meetings next week (RBA, BOC, BOE, and ECB). The market is on the fence about an RBA rate cut. The OIS shows a little more than a 50% chance of a cut after the disappointing capex data. The 2.2% decline in Q4 was more than the market expected (-1.6%) after Q3 was revised to 0.6% from 0.2%. The disappointment was also due to the fact that the non-mining sector capex also fell and that plans for the new year remain soft. Nevertheless, the relatively high yield, especially for a triple-A credit has helped underpin the Australian dollar. It extended its recent gains to $0.7910, its highest level since late January. We suspect the market will turn more cautious as the $0.8000 area is approached.