Dollar Little Changed, but Sterling and Swiss Franc Strength

Highlights

The US dollar is little changed against the major foreign currencies despite robust purchasing manager index reading throughout Europe and Asia.  The lack of much of a market reaction could reflect one of two factors.  The first and most benign factor could be the lack of participation given the long holiday weekend for much of the world.  The second and more serious consideration could be that the three day recovery in the foreign currencies is getting tired.  We would place more weight on the former, but also suspect many participants are wary that the disappointing ADP data may not be a reliable guide to the non-farm payroll report tomorrow.  Two other themes that have emerged this week remain intact.  The first is the relative out-performance of sterling.  Euro-sterling is at its lowest level since late Feb.  The other thematic development is the continued appreciation of the Swiss franc.  The euro-franc is at new record lows. 

Global equity markets shrugged off the decline in the US markets yesterday.  The MSCI Asia-Pacific Index rose 1%.  The Nikkei rose 1.4%.  It is up 14% since the mid-Feb low. It was helped today by the more than 10% rally in Dai-Ichi Life which raised roughly $11 bln in the largest IPO in two years.   China’s Shanghai Composite rose almost 1.25% to reach a 2-month high.  Korea’s Kospi was boosted by much stronger than expected export figures (35.1% year-over-year in March vs expectations for less than a 32% increase).   Indonesia’s 2% rise puts it at new record highs.   Note too that the first rise in the Baltic Dry Index in more than two weeks helped shippers.  European bourses have also begun the second quarter with strong advances.  Most markets are up around 1%.  Basic materials and industrials are leading the way, while telecom is a laggard today.  US shares are trading higher and the early call is for an almost 0.5% gain at the opening.

While bond markets were firm in Asia, with 10-year sovereign yields slipping 2-4 basis points in New Zealand, Australia and Japan, European bonds are softer with yields rising 1-2 bp.   Greek, Italian and Portuguese bonds are firmer resulting in modest narrowing of spreads.   The US Treasury will announce today the size of next week’s auctions.  After the tepid response last week’s auctions, next week sales will be watched closely.  However, note that US government bond issuance was about $392 bln in Q1, but Treasury expects Q2 issuance to be dramatically lower at around $266 bln. 

Currency Markets

Japan’s Tankan survey of 11.5k companies showed an easing of pessimism in line with expectations and it is the fourth quarterly improvement.  The -14 reading for large manufacturers was in line with expectations.  There are two more interesting components of the survey than the headlines.  The first is the capex plans.  Overall capex is expected to decline by 0.4%.  This is a significant improvement from the -13.8% reading in December.  This is important because capex and exports are the two interrelated legs of the Japanese economy.  Second, large manufacturers expect the dollar-yen to average around 91 in the fiscal year beginning today.  In the fiscal year just ending the dollar averaged about JPY93.   While the Tankan survey will no doubt be a talking point today, a more telling development may be overlooked.  The local press reported that the five top trust banks in Japan plan to boost their holdings of foreign equities in the new fiscal year by 3 percentage points to 23%.  They will trim their domestic bond holding 2 percentage points to 35% and reduce their domestic stock holdings by 1% to 30%.  It would appear then that institutional investors are going to join Japanese retail investors in exporting savings abroad.  The Japanese yen was the worst performing major currency in March losing a bit more than 4.5% against the dollar, suggesting that perhaps the “smart” money already anticipates this.  The JPY93.77 is the dollar’s high for the year thus far set in on Jan 8.  New buying is likely to be seen on a break of JPY93.80.  Support is pegged in the JPY92.80-JPY93.20 band. 

The purchasing managers’ reports, with few exceptions, are consistent with a broadening of the global recovery.  After nearly stagnating in Q4 09, and a slow start to the first quarter, the euro zone economy appears to have re-accelerated late in the quarter and this likely bodes well for Q2 GDP.  The EMU PMI rose to 56.6 from 54.2, with strong gains in output, and new orders and exports.  The export reading was at a 10-year high.  Switzerland’s PMI was to a 3-year high of 65.5 from 57.4 and gave the market an additional impetus to buy Swiss francs.  Output and new orders were particularly strong.  The UK survey was also stronger than expected at 57.2 compared with expectations of 56.8 and 56.5 in Feb.  Exports were particularly strong.  The exception to the general trend was Sweden.  The 61.1 reading is still strong, of course, but just disappointing compared with expectations for a small rise from the 61.5 reading in Feb.  The krona traded brief at new highs for the week against the euro.  Returning to the euro zone, there was one source of less favorable news and that was the larger than expected drop in German retail sales.   Feb was to be flat or down 0.1%, but instead Germany reported a 0.4% decline and adding insult to injury the Jan figure was revised to -0.5% from flat. 

There is much consternation over whether the US Treasury will cite China as a currency market manipulator in report that is due in a couple of weeks.  Two late developments would seem to shift the odds against a formal manipulation charge.  First, it is generally appreciated that there are a number of areas where the US would like to see more cooperation from China.  Cooperation on Iran is one important area and the signs now point to some greater China cooperation to tighten the sanctions.  Of course, it is more complicated than a simple quid pro quo, or any tight linkage, but on the margins it might help.  Second, the economic issue the US has with China is about trade and the currency is a way, some think, to address that.  However, the US Trade Representative office released its annual report to Congress and it is directly critical of several Chinese practices outside of its fx policy.  These include steel subsidies, counterfeiting goods, intellectual property violations, unfair use of mandatory testing data, barriers to entry in service industries, unilateral cancellation of contracts by state owned enterprises among others.  This direct criticism of unfair trade practices may also be a signal that the Obama Administration would prefer maintaining the focus on the multilateral efforts (see IMF) to pressure China on its currency policy.

Upcoming Economic Releases
The US reports a slew of economic data today.  With the national jobs figure tomorrow the weekly jobless claims won’t draw much attention.  The manufacturing ISM is seen as more important and it is expected to modestly improve from the 56.5 reading in Feb.   Feb construction spending will likely remain weak.  Watch for a strong pick up in auto sales (12 mln annualized unit pace), which should point to a healthy rise in retail sales.

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Marc Chandler is the global head of Brown Brother Harriman’s Currency Strategy Team. For more of BBH’s currency views, visit the BBH FX website here.

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