Dollar Marks Time

The US dollar has been confined to relatively narrow trading ranges. The key feature is the dollar-bloc's modest gains, along with the yen. Short-covering continues to fuel gains in the Australian and Canadian dollars and both are poised to move higher.

After dipping below $0.9000 in the Asian session, the Aussie was snapped up in Europe to return to the $0.9040 area where it appears comfortable. The $0.9080 area still needs to be overcome to signal a new leg up with the $0.9140 and $0.9200 area the next immediate targets. A close below $0.9000 risks this bullish technical view.

The US dollar has been gradually easing against the Canadian dollar, seeing a 4-year high at the end of January near CAD1.1225. Today, testing the CAD1.09 level, the greenback is at its lowest level since mid-January. We have suggested the near-term technical objective is near CAD1.0850.

The strength of the dollar-bloc is what is new this month. Recall that last month, the dollar's performance diverged. It was strong against the dollar-bloc and emerging market currencies. It was weak only against the euro, sterling and currencies, like the Swiss franc, that move in their orbit. The euro and sterling have continued to move higher this month, but the weakness in the dollar-bloc and emerging market currencies has been retraced to some extent.

The dollar had trended lower against the yen throughout January and put it lows at the start of the month near JPY100.75. The dollar reached a 12-day high yesterday near JPY102.75 and is now just above JPY102, which is essentially flat on the month. It had closed above the 20-day moving average yesterday, for the first time since mid-January. However, with US 10-year yields slipping back below 2.70% and equities trading lower (Dow Jones Stoxx 600 in Europe is off 0.25% and the S&P 500 are called lower), the risk is that the dollar's heavier tone against the yen persists today.

The news stream has been light today. The key development has been the UK data. The key takeaway here is that the unemployment rate ticked up to 7.2% from 7.1%, even though the claimant count fell more than expected (27.6k vs -20k expected). This comes on the heals of the soft CPI report yesterday and favors the BOE's push against the need for an early rate hike. Short-sterling futures have continued to recover from last week's slide. The MPC minutes did not create much of a stir, but there was an unusual reference to sterling. It observed that analysts attributed its strength to the stronger demand outlook.

The employment data and the decline in the implied yields coincided with sterling's slide from almost $1.6740 to $1.6660, roughly yesterday's lows. A break could signal a quick move toward $1.6625, but we would not expect steeper losses here today. There seems to be more talk of the positive implications of the Vodafone-Verizon unwind and this will likely deter selling.

For its part, the euro made a marginal new high for the move, rising to almost $1.3775 in early Asia, before retreating later and through the European morning. Given yesterday's run-up and the proximity of the $1.38 nemesis, what is happening today is simply consolidation. A further modest pullback would not be surprising. It requires a break of $1.3700 to negate the bullish price action.

We do not read much into the fact that Germany did not get the maximum bids at its 10-year bond sales. It happens from time to time. The last time was in September 2012. It simply means that the Bundesbank retains a bit more than usual. At today's auction the BBK retained 24% at the auction in late January it kept 16.5%. According to Bloomberg data, the average of retention by the BBK in the past four auctions was 15.25%. The auction was slopped with a 3-cent tail, more than three times larger than the recent average. The German 10-year yield has fallen 27 bp so far this year, and that low yield may be deterring buyers, but we suspect that it is more a fluke than the signal of something far more sinister.

There are three economic reports from the US today to note. First, a new producer price index will be unveiled. This makes it difficult to compare it with the old time series. Nevertheless, prices on the producer level are rising at a slower pace than on the consumer level. Second, US housing starts and permits will be reported. A 4.9% decline in starts is expected after a 9.8% decline in December. Part of what is happening is the weather, but there is more. Recall that housing starts soared by 23.1% in November. This is partly a correction to that. Housing starts overshot its trend and is returning to it. Even with the kind of decline the consensus is expecting, the number of housing starts will still be above the 6 and 12-month trend.

Later in the session the FOMC will release the minutes from its late January meeting. We would not expect a strong market reaction. Yellen's testimony before Congress seemed to underscore that there is a relatively high bar to deviating from the continued measured tapering.