Dollar Heavy Into ECB

The US dollar is trading lower against all the major currencies as the corrective forces continue to hold sway. The euro rose to nearly four-week highs in the European morning, briefly pushing through $1.08. With today’s gains, the euro has recouped 38.2% of the losses since the US election.Although we have suggested potential in this correction toward $1.0850, the next important retracement objective is a little above $1.09.  

The euro’s recovery ahead of the ECB meeting, however, seems to leave it vulnerable to a buy the rumor, sell the fact type of activity. Perhaps the rumor is that Draghi has no important surprises to unveil. Nearly everyone is looking for an extension of the asset purchases, some operational adjustment to allow it to reduce the risks of scarcity, and some measures to make it securities lending program more user-friendly. Also fitting in a pullback in the euro could be the first increase in the US premium over Germany on two-year money for the first time in five sessions today. Initial support for the euro may be pegged in the $1.0740-$1.0760 area, with a break sending the single currency back toward $1.07.  

There are three other developments that are on the radar screen of international investors today. First, Japan revised Q3 GDP unexpectedly lower to 0.3% rather than 0.5%, which reduces the annualized rate to 1.3% from 2.2%. Business spending and inventories drove the revisions, while the upticks in consumption were insufficient to do more than blunt some of the impacts. The GDP deflator was revised to minus 0.2% from minus 0.1%, leaving Japan as one of the few countries still experiencing deflation.   

At the same time, Japan adopted the best practices in terms of GDP calculation (which other countries such as the US and many European countries have already done). Among other things, it means that research and development expenditures are counted as capital formation rather than an intermediate input.  This means that at the end of last year, the Japanese economy was about 6.5% larger (JPY532.2 trillion instead of JPY500.6 trillion). The dollar held above its week’s low against the yen(~JPY112.90).A move now back above JPY113.60-JPY113.80 would likely help stabilize the dollar’s tone.