Euro Unable to Secure Stability Sentiment as EU Warns of Tough Times Ahead

Dollar Recovers its Footing after Risk Appetite Encourages a Quick Drop to a Six Week Low
Euro Unable to Secure Stability Sentiment as EU Warns of Tough Times Ahead
British Pound Rallies after Jobless Claims Dive and the BoE Minutes Mention Inflation Risks
Japanese Yen Funding Status Reinforced by BoJ Stimulus Expansion

Dollar Recovers its Footing after Risk Appetite Encourages a Quick Drop to a Six Week Low
Still riding off the buoyancy found in the EU’s vows to support Greece and the Fed’s anchoring of the benchmark lending rate at its record lows, investor sentiment continued its climb Wednesday. Invariably, this would translate into another decline for the dollar. Benchmarking the currency’s unfavorable progress today, both the Dollar Index and EURUSD exchange rate (the former being highly correlated to the latter) established a six week low for the greenback before pulling back into a comfort zone. This selling momentum looks a little more convincing with the pound, Canadian, Australian and New Zealand dollar pairings though. However, both the climb in underlying risk appetite and the greenback’s weakness are established under questionable means. For investor confidence itself, the Dow Jones Industrial Average’s advance to a new 17-month high realizes a meaningful milestone for the benchmark; but conviction behind this move seems lacking. The same can generally be said of most of the growth- and yield-sensitive markets. Not only has momentum failed to develop; but the mechanics behind asset relocation do not support a building of risky positions. This hesitation is not unreasonable. Despite the pretense of improved financial stability, the markets are still far from smooth sailing. It would not take much for the Euro area to come under stress once again, ratings agencies are warning of negative outlooks for major economies, and government stimulus is already being rolled back despite a notable lack of permanence in tentative growth trends. All told, this reaffirms the dollar’s status as a safe haven currency. What’s more, the protection this currency establishes in liquidity supports its recent appreciation of risk premium. Over the past month, we have seen benchmark US market rates climb. This has notable pushed the three-month US Libor rate above its Japanese counterpart, which has helped the dollar shed its status as a funding currency and take on the guise of a yield-bearing currency. We are still at the early stages of this transformation, but it may be enough.

Going forward, the development of risk appetite and the dollar’s acclimations should be the filter for economic developments. Today, the scheduled event risk that crossed the wires would do little to further the outlook for higher rates. The headline Producer Price Index figures for February unexpectedly contracted due to a sharp drop in energy prices (2.9 percent) and a notable contraction in capital equipment (0.1 percent). For trend, the annualized rate would fall back from a 15-month high to a 4.4 percent clip. More importantly, the core figure was unchanged from its 1.0 percent rate. This less-volatile figure is the better benchmark for monetary policy; and these levels offer little reason to expect a near-term interest rate adjustment to contain pressures. However, the true benchmark for interest rate speculation is tomorrow’s consumer-level inflation figures.
The official forecast is calling for the annualized rate to cool to a 2.3 percent clip from a previous reading of 2.6 percent. For reference, the Fed’s medium-term target is 2.0 percent. Even more debilitating to the fledgling, hawkish outlook, the core CPI figure is expected to temper to a 1.4 percent rate. In a nation where the outlook for growth is uneven and feeble while fiscal health is badly depressed, inflation is the only practical argument for near-term rate hikes. Another notable indicator to take note of Thursday is the fourth quarter current account balance. This is a critical measure for the flow of capital over the boarders; and the improvement or deterioration of this figure could meaningfully adjust growth forecasts.

Euro Unable to Secure Stability Sentiment as EU Warns of Tough Times Ahead
It is difficult to maintain confidence in an economy and currency when the same policy officials that voice confidence in stability simultaneously voice their doubts. This morning, a range of central bankers and lawmakers followed up on the European Union’s vow to support Greece should the nation need it by suggesting no aid would be needed and the economy would find solidarity from its fellow Union members. However, directly after this cheery prospect, the European Commission called for Spain, Italy, France and Germany among other members to provide better detail on how they plan on reducing their deficits to within the group’s limits. This inquiry stems from the EC’s concerns that the governments are too optimistic (and therefore dependent) on growth. Indeed, the leaders of all of these nations seem overly confident of a sharp economic recovery when the global consensus itself is relatively mute. Pressured to keep their deficits below a 3 percent cap with GDP, this seems a difficult hurdle to clear for most of these economies. However, if the outlook for growth is perhaps too positive for these leaders of the regional recovery; what about the laggards? Greece was already very optimistic about its ability to rein in its budget shortfall. If growth stagnates for this ailing economy, the implementation of austerity measures will have to be deferred or the nation itself could spiral into a depression.

British Pound Rallies after Jobless Claims Dive and the BoE Minutes Mention Inflation Risks
From a simple assessment of market-moving potential, the UK’s economic docket promised to be the most interesting. And, though it is not often the case that a hearty helping of event risk actually translates into a distinct and aggressive move for a currency; that is exactly what we witnessed Wednesday. Concurrent releases of the BoE minutes and employment data would give the same bullish bearing for sterling traders to react to. From the central bank’s statement, we would read through the same unanimous vote to keep the benchmark lending rate unchanged and the agreement to keep the bond purchasing program unchanged at 200 billion pounds. However, speculators would pick up on the note that some members perceived inflation risks to have increased. The commentary warned that if energy prices and the exchange rate contributed to price pressures, that the already high inflation rate could remain unacceptably high longer than anticipated. This is still a very early sign of hawkish pressure, but it is an argument to be made nonetheless. From the labour data, jobless claims unexpectedly drop by a net 32,300 filings – the biggest drop since 1997. Furthermore, the claimant rate would tick down for the first time since February 2008. A good sign for growth.

Japanese Yen Funding Status Reinforced by BoJ Stimulus Expansion
With an impending expiration on its original three-month 10-trillion yen lending facility program; the Bank of Japan would have to make a decision on monetary policy. Letting the program expire could further depress credit and leverage deflation trends.
Instead, the group voted to double the facility (with two notable dissentions) and further loosen its policy stance. This certainly bolsters the yen’s appeal as a funding currency. Coming up, the BSI confidence surveys for the 1Q will offer a measure of health and potential spending for the business sector.