Dollar Softer But Still Range-Bound

The US dollar has given back most of yesterday's gains though the euro has been unable to resurface above $1.09. The uptrend that marked most of Q1 has morphed into what appears to be a range affair. However, the range-trading is deterring fresh position-taking. A review of the gross currency positioning from the latest Commitment of Traders report shows that for the most part bulls and bears have been trimming exposures.

The FOMC minutes from the March meeting which dropped the word patience but lowered the economic and Fed funds projections will be the highlight of the North American session. While the minutes make for nice reading—if you like that sort of thing— in terms of policy signals, we argue it is weak. It is a cacophony of sounds, and the minutes are crafted in a way that make it difficult to understand what is being argued against.

There is some risk that participants read the minutes dovishly, especially in light of last week's disappointing employment report. No doubt the exchange rate got more air time. We argue that the Fed's leadership is key for the policy outlook, and it has already expressed itself on a number of issues that will likely be discussed in the minutes.

First, the Yellen Fed has begun normalizing monetary policy by normalizing the forward guidance. It is not longer date specific, but rather driven by the data. Second, the Fed would like to see the economy move closer to the dual mandate of full employment and price stability, without risking the third mandate of financial stability. Third, the US economy faces headwinds, but they will likely prove temporary, and this includes the impact of the dollar's rise. Fourth, even when lift-off comes, the rate increases are likely to be gradual and peak at levels lower than past cycles. In this sense, neither 1994 nor 2004 will be models for this cycle.

In the UK, news of Royal Dutch Shell's (NYSE:RDSa) purchase for GBP47 bln the UK's BG Group (LONDON:BG) has helped do for Sterling what yesterday's stronger than expected service PMI failed to do, which is to push it higher. Sterling reached almost $1.4950 and has not been above $1.50 since March 18. Even though part of the transaction will be paid in cash, we are suspicious of its real, as opposed to psychological, impact on sterling.

The FTSE is, however, leading the European bourses higher today, where the Dow Jones STOXX 600 is above its record closing higher from 2000. Both of which are being led by the energy sector today. The drop in oil prices requires new industry rationalization, and mergers and acquisitions are one form it takes.

Th euro recovered from its test on $1.08, but is now stuck below the $1.0885 high from North American hours yesterday. The news stream has been limited and not necessarily that supportive. German factory orders unexpectedly fell for the second month in February. The 0.9% decline compared with the consensus forecast for a 1.5% increase. The disappointment was only partially mitigated by the revision of the January series to show a 2.6% decline instead of the 3.9% fall initially reported.

Recall that the German manufacturing PMI rose in February and March to stand near a one year high. Industrial output figures will be released tomorrow. The consensus calls for a 0.1% increase after a 0.6% rise in January. The risk is on the downside. We note that Q4 '14 was the first quarter since Q1 '11 that industrial output rose in each month.

Separately, the eurozone reported a 0.2% decline in February retail sales. This was the first decline since last September and follows a 0.9% rise in January, which was initially reported at 1.1%.

Meanwhile, the dollar has been unable to sustain yesterday's gains against the yen either. The dollar finished the North American session yesterday above the 20-day moving average (~JPY120.20) for the first time since March 19. It has slipped to JPY119.70 were it appears to be finding a better bid. Large option positions (JPY119.50 and JPY120 strikes) roll-off today. There have been two developments in Japan to note today: the BOJ meeting and current account.

The BOJ meeting did not result in a change in policy. Moreover, despite pleas from some quarters to respond to the disappointing Tankan and decline in inflation, the BOJ's Kuroda indicated no great urgency. The BOJ sees a continued moderate recovery, and while inflation may remain near zero for the time being, it is still expected to pick up later this year. Surveys indicate that a majority of economists expect the BOJ to take more action.

Japan's current account surplus rose to JPY1.440 trillion in February, which is about 20% larger than expected. Improvement on the trade balance accounted for about half of the improvement from January. The other half is the from the investment income account, where the decline in the yen’s exchange rate bolsters the foreign currency value of the coupon and dividend stream. The capital account figures show Japanese investors scooped up the most US Treasuries in six months; the most Australian bonds in 3 ½ years and the most Italian bonds on record. This likely reflects the ongoing diversification of Japanese pension funds.