Dollar Weakened In Indecisive Markets, Eventful Week Ahead: April 23, 2012

The anticipated rally in dollar and selloff in risks didn't happen last week. Instead, a couple of developments were positive to other currencies except the dollar and yen. The euro was supported by solid bond auctions from Spain as well as upside surprises in confidence indicators. Canadian dollar was boosted after BoC turned hawkish.

Meanwhile, sterling was also boosted by less dovish than expected BoE minutes. IMF raised global growth forecasts and successfully secured additional funding. Additionally, the dollar was pressured by disappointing job data. Last week development shifted near term outlook in the dollar to mildly bearish. But we'd like to point out that the Dollar Index is bounded in a near tern triangle pattern and thus, outlook is indeed rather uncertain. We'd need some decisive price actions to clear the picture.

After a week of fund raising campaign, IMF chief Lagarde finally achieved the $400b target and secured $430b of extra contribution to the fund's war chest. That includes $200b from eurozone, $60b from Japan, $15b from South Korea, $15b from UK, $15b from Saudi Arabia, $10b from Sweden, $10b from Switzerland, $9.3b from Norway, $8b from Poland, $7b from Australia, $5.3b from Denmark, $4b from Singapore and $1.5b from Czech Republic. In addition, $68b is secured from BRICS and some middle-sized economies even though the specific amounts was not revealed yet.

The final amount from BRICS will be announced at a G20 meeting in Mexico in June while Russia has already said it will commit $10b. The initial goal of Lagarde was $600b be but was scaled back after recent policy actions from eurozone eased the risks of the crisis. Nonetheless, Lagarde regard the fundraising a "huge effort" which nearly doubled IMF's current resources of $485b to above $1T.

Earlier in the week, IMF raised global growth forecast to 3.5% in 2012 and 4.1% in 2013, up from prior projection of 3.3% in 2012 and 4.0% in 2013. US growth projection was revised up from 1.8% to 2.1% in 2012 and from 2.2% to 2.4% in 2013. Growth in advanced economy, including US, Japan, eurozone, UK and Canada, is projected to be at 1.4% in 2012 and 2.0% in 2013, up from prior projection of 1.2% and 1.9% respectively. Emerging economies are expected to grow 5.7% in 2012 and 6% in 2013, up from prior projection of 4.4% and 5.9% respectively. However, note that outlook in eurozone was not that good.

The eurozone economy is expected to contract -0.3% in 2012 before posting 0.9% growth in 2013, slightly better than prior expectation of -0.5% and 0.8%. Recession in Spain is expected to be deeper than expected at -1.8% in 2012. Overall, IMF noted that "the most immediate concern is still that further escalation of the euro area crisis will trigger a much more generalized flight from risk."

Meanwhile, Spain's problem hasn't really gone away in spite of relatively solid debt auctions. Benchmark 10-year yield once dipped below 6% level during the week but climbed back above 6% again on Friday. There were concerns that after Bank of Spain data showed that non-performing loans as a proportion of total lending rose to 8.16% in February, the worse figure since October 1994. Spanish banks will also need to set aside EUR 53.8b to meet the new real estate rules.

Banks will take provisions of EUR 29.1b and create a capital buffer of EUR 15.6b. ECB executive board member Asmussen somewhat played down the problem in Spain and said recent shift in sentiment is mainly "a result of poor communication on deficit targets and delays in announcing the budget" and the problem could be " fixed by taking measures to regain credibility." Spain will, nonetheless, remain a focus in near term.

In the US, a major point to note is that recent initial jobless claims picture is hurting the recovery picture. Initial claims eased slightly to 386k in the week ended April 14 but that's the second consecutive week the figure stayed above 380k level. The 4-week moving average is also back above 370k level at 375k. While two weeks of data is too early to declare deterioration in the US job markets, it definitely a sign that hiring is losing momentum. And sentiment would gradually be changing from expecting claims to drop further to below 350k, back to nervousness of when claims would climb back above the 400k level.

Sterling soared broadly last week on more hawkish than expected BoE minutes. Adam Posen dropped his call for expanding the quantitative easing program during last meting while all nine MPC members voted to keep rates unchanged at 0.50%. Posen and David Miles voted for BoE to raise the asset purchase program by another GBP 25b back in March. But this time, only Miles was left. And even Miles now described his view as finely balanced. Overall, the minutes showed that policy makers are wary of inflation risk as it said that "there was a risk that inflation would fall more slowly than assumed in the February inflation report projections, and the recent flow of data provided some support for this view."

Canada dollar also attempted a rebound last week after BoC surprisingly turned hawkish. BoC, while leaving the policy rate unchanged at 1% since September 2010, cited stronger momentum in domestic growth, better US outlook and the eurozone's possible emergence from recession are adding confidence to policymakers. GDP is projected to grow 2.4% in 2012 and 2013 before dipping back to 2.2% in 2014. The bank also expect economy to return to full capacity in first half of 2013.

The inflation profile is also expected to be firmer. Headline CPI is expected to be around 2% over the balance of projection horizon. Most importantly, the bank said that "some modest withdrawal of the present considerable monetary policy stimulus may become appropriate" and the timing will be "weighed carefully against domestic and global economic developments." That is, BoC has opened the door for tightening.

The April RBA minutes signaled that policymakers did not consider cutting interest rates appropriate at the meeting, despite softer employment market and downward revision in economic assessments. The possibility of a rate cut appears lower than what is priced in the market. Yet, the CPI print for 1Q12 would be a key determining factor for the monetary decision. As stated in the minutes, "members had lowered their assessment of the pace of growth somewhat" and "if slower growth in demand could be expected to result in a more moderate inflation outcome, then a case could be made for further easing of monetary policy."

Moreover, it's mentioned that there is an "opportunity at its next meeting to review the inflation outlook based on comprehensive new data on prices, as well as information on demand and output." These indicated that the inflation report for 1Q12 would be a determining factor for the monetary decision in May.

The Swiss government finally named Thomas Jordan as the president of SNB. Jordan has been interim SNB president since January after Hildebrand stepped down. Also Fritz Zurbruegg will join the SNB three-man governing board with Jean-Pierre Danthine staying as vice president.