Dollar Firmer, But Still Going Nowhere Quickly

The US dollar has begun the new week on firm footing, but the tone is more consolidative than trending. The dollar-bloc currencies, led by the New Zealand dollar in particular, are softer despite China's rate cut, which sometimes has been supportive for commodity-linked currencies. Emerging market currencies did not get much of a boost either.

The New Zealand dollar is off 1.4% amid heightened speculation of a rate cut as early as next month. Indeed, a local bank is calling for a June and July rate cut. The New Zealand dollar initially tried to rally on the Chinese rate cut announcement, but fell back on local press reports and softer electronic retail sales (typically not a market mover). The kiwi has been sold to near two-month lows, below $0.7400. The next level of support is seen near $0.7320. However, the risk extends toward the February and March lows in the $0.7170-$0.7200 area.

The news stream is light to start the week. The BOE meeting that was shifted from last week to today due to the election, is unlikely to change the expected results. The MPC continues to be on hold. There are some thoughts that the election may bring forward the first rate hike. The implied yield of the short-sterling futures curve is 3 bp higher in the front end and 4-5 bp higher in the back end. The 10-Year UK gilt yield is up 4 bp, in line with core European bonds.

If there is a residual impact from the election, it may be the FTSE, which is bucking the regional equity slide to post a modest 0.4% rise near midday in London. The move is being led by materials. Financials are the poor performing sector with a flat showing. Sterling itself is consolidating in a narrow range of about 3/4 of a cent at the upper end of the post-election spike. As the market's attention returns to economics, sterling may be vulnerable to disappointing data. That said, the shallowness of the pullback and intra-day technicals suggest a retest on the $1.5500-$1.5525 cannot be ruled out.

Norway reported an ever so slightly disappointing April inflation report. The krone was one of the stronger currencies last week, but is the weakest after the kiwi today, losing 1.2% against the US dollar. Last week it had gained 1.6%. The headline increase was 0.4%, which was actually more than expected, but the underlying rate, which in Norway excludes taxes and energy, was softer at 0.4% on the month and 2.1% year-over-year.

We suspect today's krone drop was a bit of catch-up rather than a real fundamental shift. Norway's inflation rate is the envy of many countries. The rate cut that Norges Bank said is possible next month owes more to the potential weakness of the economy than deflationary conditions.

Meanwhile the euro itself weakened in Asia to just below $1.1135 after finishing last week at $1.1200. Support is seen near $1.1065, last week's low, but it probably requires a break of the $1.0980-$1.1000 area to signify anything significant.

German bunds, which recovered at the end of last week, are under pressure again to start the week. The 10-Year yield is up 5 bp. Italy, Spain and Portugal's 10-year yields are up (6-7 bp) today, which appears to be a little more than the backing up in similar Greek yields. Greece owes the IMF about 770 mln euros tomorrow. It is expected to make this payment.

However, the pressure is mounting as Greece has about a 1.5 bln euro payment next month and still needs to pay government workers and pensions while its primary budget balance is slipping back into deficit. The Eurogroup of finance ministers meets today for the sixth time since the Greek election. The previous Greek government also failed to get an aid payment after the middle of last year. The Syriza government has somewhat different problems, but the results are the same: No funds.

What is important for today's meeting is an indication from the finance ministers that there is progress in the negotiations. Without this signal, the ECB may bow to the pressure from some of the creditors to increase the haircut on Greek bonds being used for collateral for ELA funds. This would bring forward the day that Greek banks run out of funds and what the ECB has recognized as a liquidity issue would become a question of solvency.

A subdued North American session is likely today. The only data of note is the Fed’s new Labor Market Conditions Index. The index had spiked to 7.0-7.1 in November-December 2014 from an average of 3.7 in Q3. It then declined every month in Q1 15 to -0.3% in March. Market participants are less familiar with this than the JOLTS report due out tomorrow which is expected to show improvement. JOLTS is reported with an extra month lag but did rise in January and February.