Euro unlikely to bounce on support, at least until 2-yr German yield trajectory changes

Outlook:

The bad payrolls report on Friday followed some other disappointing reports and led to the sky-is-falling crowd coming out in force. This is so annoying that one is inclined to look for any factor to rebut them. At the risk of appearing crackpot, we have said all along that the weather has a lot to do with first quarter weakness, not anything that can be called “malaise.”

Now Market News reports something from BoA Merrill Lynch called an "Extreme Winter Weather (EWW) Index,” which ranks this winter as “the 10th most severe US winter since 1960." BoA ML says "Weather alone appears sufficient to explain recent weak U.S data" and said the "data may turn in the second half of April."

Thank goodness. We are not crazy. The BoA ML folks go on to apply the data to FX, recommending buying the dollar on any further dip. We are not willing to go that far, but we do want to note (again) that it takes a steady diet of good or improving numbers to support the dollar. This has been a market condition for decades and even the young whippersnappers who were not around in the 1980’s to wit-ness the Plaza and Louvre Accords seem to have absorbed the lesson.

And that leaves everyone pondering the dovish implications of the payrolls report and other data. Atlan-ta Fed Pres Lockhart said yesterday he favors pushing out the first rate hike beyond the next two meet-ings, presumably meaning September at the earliest. This comes on the heels of NY Fed Dudley’s re-mark that even when rates do go up, growth is only moderate and the path of increases will be “shallow.” Another misuse of the English language, but never mind. We have been calling this “lowish for longer.”

Ah, but what if April payrolls is some stunning number like 350,000 and other metrics surprise on the upside—retail sales or housing, for example? Remember that the ISM survey chief is worried about too strong growth not being sustainable. In other words, our scenario for the US economy is pricing in a plodding pace of recovery and thus a plodding pace of Fed responsiveness—but let’s not forget it’s only a forecast. We can get surprised on the upside. Moreover, the common perception that the dollar is too strong and will derail the economy is nonsense. Depending on what data you prefer, exports are 14-17% of the US economy. The World Bank says 14%. Other countries have far higher ratios—Germany has 46%, for example. The Netherlands has over 80%. The currency effect on activity is very small in the US and more sentiment than real.

ING, Bloomberg’s winner of the best FX forecaster award, says “The stronger dollar doesn’t necessarily have to change the U.S. ecaonomic prospect.” ING forecasts euro parity by mid-year and 95¢ by year-end. (The Bloomberg survey median is $1.05 by midyear, by the way.) The No. 2 in the Bloomberg FX forecast contest, Credit Suisse, agrees with ING. It sees the June rate hike as still in the cards. It will take a lot more than one data point to change the perspective. Only the No. 3 FX forecast winner, Saxo, thinks most of the move is over.

The connection between data and the institutional response is not as straightforward and simple as we like to think. Bad data, central bank pulls back. Good data, central bank raises expectations. For one thing, central banks move at a glacial pace. Somebody is always complaining that “the Fed is behind the curve.” Look how long it took the ECB to get to QE, a good 6-9 months longer than the clamoring mar-ket wanted. So, for all we know, the Fed is still aiming for June. And let’s not rule out the BoE. Inflation is zero or negative, but perhaps it will name some other inflation-inducing data (household credit, for example) to start threatening hikes. Bottom line, we should not imagine that central banks have the same mental processes as market participants. Traders are from Mars and central bankers are from Venus.