Macros And The Dollar

The US dollar has stabilized from a sell-off that took it to JPY118.50 and lifted the euro to almost $1.0750.  Disappointing US data has squeezed out some late longs and unwound the rise the implied yields of the December Fed funds and Eurodollar futures contracts. The gap between the market pricing of a December lift-off contrasts with the surveys which showed a large majority in the June-Sept period. 

In the larger picture, after significant and sustained trend, the dollar appears to have entered a consolidative phase. It coincides with the disappointing US data and some positive developments elsewhere, including the recovery in oil prices. 

The broad euro range is roughly $1.05-$1.10.  It could not get above the mid-point, and only briefly traded above the neckline of the double-top posted a little above $1.10 in last March and early April. Intra-day support is seen in the $1.0575-$1.0610 area.  

German economic institutes have raised their growth projections for the world’s fourth largest economy. It has been lifted from 1.2% to 2.1% this year, and 0.6% growth in Q1. In contrast, it appears the US economy stagnated then. Inflation is seen at 0.5% this year and 1.3% next. The ECB’s survey of professional forecasters were also more upbeat on the region’s growth prospects this year. The bank lending survey also pointed to improvement. Earlier today the auto industry association estimated auto sales at 10.4% year-over-year in March, the 19th month of growth. There was an 8.6% increase in Q1 to 3.5 mln car registrations. There is some push back that some registrations may exaggerate auto sales, but it is the best timely estimate. 

Still what holds the euro back is expectation that ECB asset purchases will continue to drive bond yields lower. The German 10-year yield is slipping through 9 bp and a fall into negative territory seems inevitable. There is concern that with the German government refusing to increase its borrowing, given the price, and instead planning on paying down some debt, in the context of ECB demand and private sector demand and use of collateral, that a significant shortage is developing. Even though Draghi played this down, we note that the acceptable bonds that can be bought were increased by more than 90 bln euros by yesterday’s inclusion of more supranational.