Week in FX Americas – USD Retreats After European Deflation Fears Subside

Two of the biggest drivers of USD strength were weakened this Friday. The concerns from the market regarding the Chinese economic slowdown were dispelled somewhat after the Prime Minister issued words of assurance. European deflation fears were reduced after Germany, the biggest economy in the EU, posted a slower decline.

The USD retreated across the board with commodity production nation’s currencies the biggest winners on the China news. There have been some analysts who warn market participants not to price the Chinese stimulus before more details emerge. China has been on the record as ready to step in, but they haven’t outlined how or what size the intervention could take.

German Inflation Calms Deflation Fears
German inflation was 0.9 percent, well below the ECB target, but only lost 0.01 since the 1 percent reading in February. The somewhat positive inflation reading gives the ECB some breathing room in next week’s meeting. Deflation could force the central bank to introduce new stimulus measures which will devalue the EUR. The fact that the need for those measures is not as urgent boosted the currency versus the USD.

Contracting Fed Member Statements
Not helping the dollar were various statements from Fed members that were not optimistic about rate hikes until after mid 2015. Federal Reserve chair mentioned in her post FOMC meeting last week that rates could be higher six months after the end of the QE program’s tapering. At the current pace of $10 billion a month the end could come as soon as this fall. Leaving spring of 2015 as the soonest the Fed would be ready to raise interest rates. Chicago Fed president said this week that he does not see rates going up until 3 months later.

Mexican Peso Outperforms on Unexpected Trade Surplus
Overall USD weakness helped the MXN touch a two month high after it was reported that the nation had an unexpected trade surplus in February. The forecast called for a $200 million deficit. The market reacted to a strong $976 million surplus . The Mexican peso has been a consistent performer even in the current emerging market averse environment. Fiscal and energy reforms have increased the credibility of the current government as the economy benefits from a US recovery shielding the currency from the bigger impacts. Volatility for the currency has decreased as more reforms are expected that will help the country achieve its growth targets.