Asian Morning Update

Dollar mixed to lower overnight

by Ian Copsey of Global Forex Trading

German February Final CPI was confirmed to be as originally reported at +0.4% MoM and +1.6% YoY. Food, healthcare and communications eased lower while rent and clothing moved higher. While the headline rate is not excessive it will not please the ECB which wishes to see the rate decline from the higher 2.0% band to allow for further price risks from energy and wage inflation. Note that the German number accounts for 40% of the total EU number. Indeed, the Euro-zone Final CPI for February was released unchanged and recorded the sixth consecutive month below the ECB’s 2% ceiling. As per Trichet’s comments on Wednesday the focus is now on containing wage settlements.

Plenty of ECB speakers on the day when the Monthly Report was published with the same message that rates remain accommodative and liquidity is still high. There was little difference between the underlying comments but were sufficiently strong to suggest that a 4% cap is by no means certain. Probably the likelihood is for a further hike thereafter. The Monthly Report highlighted the two risks to inflation – oil prices and wage inflation.

Possibly Weber provided the most notable comment by saying the market is still complacent to risks, noting that corrections, such as the current one, are useful reminders of the risks that exist. Furthermore, the hunger for higher yields has caused an under pricing of risks and that a rebalancing of the global economy is a pressing issue. He noted that complacency raises the chance of a disorderly correction, something that warrants close monitoring by central banks.

The SNB delivered as promised with a 0.25% hike following its quarterly monetary policy assessment. The next meeting is on June 14th and whether there will be a further hike will depend on the economic performance against their forecasts of a GDP of 2.0% this year with inflation rising to 0.5% while next year they expect it higher still at 1.4%. From previous statements the SNB has made its proactive stance on inflation and while there is any significant upward pressure the chances of a further hike must be quite high.

The BOE’s Sentance commented today that if inflation is to decline towards the 2.0% target then consumer spending must moderate. He said, “It is likely that more subdued growth in consumer spending will be required to keep inflation in check, at least for a while.” The implication is with the general hawkishness of the MPC that further rate hikes are most likely if the current consumer & housing boom remain on such a strong upward trend.

U.S. PPI rose by +1.3% in February and significantly firmer than the forecasts of +0.4%. Core prices higher by +0.4% and the YoY rate up by 2.5%. Vehicle prices were lower with tobacco, food, and energy all posting gains. With slowing production numbers the upward pressure on prices will be a concern.

The two surveys published yesterday did not make good reading with the Empire Manufacturing Index dropping off the side of a cliff by a huge 22.5 points to just 1.85. New orders were down by 15.79 to 3.14 while the fall in the employment index was less dramatic by 1.33 to 11.37. The Philadelphia Fed Factory survey saw a drop of 0.4 to 0.2 when forecast had been looking for a more positive number around +3. The number continues the poor run of releases over the first three months of the year.

U.S. Initial Jobless Claims were released at 318K and lower than forecasts of 328K while continuing claims were up by 48K to 2.576mn against forecasts of 2.538mn. While the numbers were slightly better than expected the trend remains higher and there is little evidence of strength coming from other statistics right now. Certainly it is not enough to reverse the general bearish sentiment for the Dollar.

Just to rub salt into the wound ex-Fed chairman Greenspan commented that there was a risk that rising defaults in subprime mortgage markets could spill over into other economic sectors. However, he did concede that the evidence was hard to find but added, “You can't take 10% out of mortgage originations without some impact.”
Overall the Dollar had a mixed day but with a general soft underbelly which appears to be thoroughly tested this morning in Asia as the Dollar falls against the Euro to above the 1.3258 prior peak towards the 1.2102-08 lows against the Swissie. This is broadly in line with forecasts with 1.3300-20 Euro and 1.2090-10 Swissie likely to hold on this move.

There is definitely more to go in this round of Dollar weakness but on a medium term outlook we appear relatively close to targets around 1.3367-82 Euro and 1.2026 Swissie. We should see the Dollar fall back a bit against the Yen as well today with a move to below 117.00 before it tries to test the 117.80-00 target.

More later when the analysis is complete.

The Asian economic releases expected today are:

Japan - January
Tertiary Index (MoM) +1.2%
Coincident Index
Leading Economic Index