Dollar Mostly Firmer, Data Ignored As Market Awaits Fed

The US dollar is firmer against most of the major and emerging market currencies, though is weaker against the euro and Swiss franc. The strength of the euro and and franc appears to be a result of cross play amid position adjusting. The euro had already extended its gains to almost $1.34 prior to the release of the better than expect ZEW survey (38.5 vs 38.1 consensus and 36.4 in May). It actually backtracked to almost $1.3375 afterward before making another stab at the highs. The price action is consistent with a double-no-touch structure with the top strike near $1.3400 (lower end is said to be near $1.18)

Some participants are selling into the euro's gains in the European morning, with stops thought to be above the 200-week moving average which is found just above $1.3450. Many short-term participants have a bias to reduce short dollar exposures going into the FOMC meeting. If the talk of tapering has counter-intuitively led to a weaker dollar, confirmation that it will not be delivered now and remains data dependent is seen as constructive for the greenback.

There have been three other developments to note in addition to the ZEW survey. First, the minutes from the Reserve Bank of Australia meeting earlier this month reiterate that there is scope to reduce interest rates, given the inflation outlook. The decline in the Australian dollar was not seen as sufficient, and a further decline in line with the terms of trade remains desirable. Between yesterday and today, the Aussie has pared more than 62.8% of last week's gains, putting it in a position to re-challenge the recent low near $0.9325.

Second, Japan halved its estimate for April industrial output to 0.9% from 1.7%. This follows a similar 0.9% rise in March. Although the magnitude of the revision was disappointing, industrial output has still been up for five consecutive months. The May trade figures are due first thing Wednesday in Tokyo. A further increase in both imports and exports is expected to result in a wider deficit in both nominal and inflation adjusted terms. Economics Minister Amari seemed to rule out delay in the retail sales tax hike planned for next year.

Third, the US inflation reports were mixed, with producer prices a touch softer than expected, while at 2.7%, the CPI was firmer than expected. Although ONS noted that airfare and fuel prices were firmer, the core rate of inflation ticked up to 2.2% from 2.0%. Sterling made a new 4-month high yesterday just above $1.5750, but has failed to sustain the momentum and is slipped through yesterday's lows. Market talk attributes sterling's weakness to selling pressure against the euro, which some link to M&A flows. A two-month downtrend comes in now near GBP 0.8585.

Fourth, in Israel, ECB President Draghi largely reiterated ECB policy, breaking no new ground. However, of note, he did say that the ECB's policies are rooted in ordoliberalism. We found this revealing. Ordoliberalism contrasts with the Anglo-American neoliberalism in its call for a positive and strong role by the state to foster an open and competitive market and an efficient allocation of capital. Its roots are in Germany in post-war period. Much of the criticism of ECB policy in general and Germany in particular seems to be neoliberals critiquing ordoliberalism.

A more compelling critique requires critiquing European policies within an ordoliberal framework. Those that have done so, until now, like the BBK's Weidmann do so primarily from a more orthodox ordoliberal vantage point. A critique from a less orthodox position is needed, but it does not appear to be emanating from Germany's Social Democrats, a seemingly natural place for it.