Dollar Firms Within Confined Ranges

The US dollar is extending yesterday's gains but remains well within ranges that have confined the greenback for more than a month now. There are two main catalysts.

First NY Fed President reaffirmed the idea that the Federal Reserve has a tightening bias. It is looking to raise rates. It wants the data to provide a suitable opportunity. It still see Q1 weakness as largely transitory and anticipates such an opportunity to arise later this year.

This means that soft Q1 data or even April data will not be a key determinant of Fed policy in late Q2 or Q3. A strong employment report in early May could spur a sharp swing in the pendulum of expectations, which we suspect has swung too far against lift-off this year.

Second, the combination of ongoing asset purchases, which are depressing rates and the heightened concern about a Greek default and exit is taking a toll, even though a cyclical recovery is taking hold. Today, for the first time, three-month Euribor has slipped below zero, and Spain sold a three-month bill with a negative yield. Germany's ZEW was the only economic report of note from the eurozone today. On Thursday, the flash PMIs will be reported and are expected to show further improvement.

The ZEW was mixed. The assessment of the current situation jumped to 70.2, which is the highest since July 2011. And why not? German interest rates are negative going out nine year and the 10-year yield, now a little above 7 bp, is expected to fall below zero as well. The DAX is up 22.3% year-to-date, which leads all major markets and most emerging markets this year. With its industrial capacity, Germany benefits from the decline in the euro in a way that others without the capacity (see Greece, for example).

On the other hand, is this the best it gets for Germany? The ZEW expectations component did not only come in below expectations, but it showed a decline from the March reading (53.3 vs 54.8).

While the euro, sterling and yen are weaker against the US dollar, the dollar-bloc itself is little changed. The RBA minutes, echoed Governor Stevens recent comments, indicating the door is still open for a May rate cut. The Aussie, which was testing the $0.7840 area at the end of last week and early yesterday slipped back below $0.7700, has steadied now near $0.7720. This is in contrast to the Canadian dollar, where Governor Poloz has implied that the insurance policy taken out in January has been sufficient. Coupled with higher Canadian oil prices and a six-month high in core CPI, speculation of another rate cut has diminished.

Elsewhere, we note that Sweden reported a sharper than expected decline in unemployment, and this lent support to the krona, even though the central bank seems more concerned about deflation than the real economy itself. The March unemployment rate fell to 8.0% from 8.4%. Swedish unemployment swings around quite a bit. It was 9.2% last June and fell to 7.0% at the end of the year, only to jump to 8.4% in January and February. The Swedish krona is flat against the dollar, but up about 0.3% against the euro.