Dollar Goes Nowhere Waiting For Eurogroup

The US dollar is little changed in Europe after a quiet Asian session. Both the US and Canada are on holiday today. The key focus it Eurogroup meeting today. The terms of Greece’s aid are still being discussed.  

Although the Eurogroup head Dijsselbloem claimed today was a deadline as some European parliaments, including Germany, would have to approve any change in terms, and that this would need to be done before the end of the month when the current extension expires. Yet we do not expect an agreement to be reached today. However, some signs of progress may be needed to keep the optimism seen in the second half of last week intact. Greek bonds and stocks saw those gains pared today, though, more broadly, European stocks and bonds are lower today. 

The most important economic data reported today did not come from the euro area, but Japan. Japan’s economy expanded by 0.6% in Q4.   The contraction seen in Q2 and Q3 ended, but without the pop that was expected. The consensus expected a 0.9% expansion. The year-over-year rate was 2.2% not the 3.7% forecast. The softness was evident in both consumption (0.3%) and business spending (0.1%). Net exports rose 0.2%.   The GDP deflator rose 2.3% rather than the 1.9% the consensus forecast after 2.0% in Q3.  

The data is sufficient to keep ideas that the BOJ will not alter is asset purchase program at this week’s board meeting. Many observers continue to expect additional measures from the BOJ as it becomes clearer that its inflation target will not be met. Officials have signaled intentions on looking past the decline in oil prices, which are included in the core measure of CPI that the central bank targets.  

Meanwhile, Japanese bond market has turned more volatile. The 10-year yields reached 46 bp today, the highest in nearly three months. The yield was near 20 bp a month ago. The government will auction JPY1.2 trillion of 20-year bonds tomorrow. The yield of the current 20-year bond is also the highest since last November. Some observers attribute the rise in yields to the ongoing diversification of the national pension funds,  Still, recall that under the existing QE, the Bank of Japan is buying nearly all the new JGB supply this year.