- USD does little; dovish Bernanke media blitz continues
A much quieter Tuesday saw softer equities, firmer bonds and a modestly stronger dollar, suggesting at least some consistency across asset classes – although belying the recent shift in the USD-risk positive correlation. Mixed US data failed to provide much direction; March Consumer Confidence help up reasonably well at 70.2 from an upward revised 71.6 in February; against that, the Richmond Fed Manufacturing index fell by more than expected to 7 from 20; and S&P/Case Shiller home prices showed the Jan. 20-City Composite Index down 3.78% yr/yr up from -4.06%, much as expected. Fed Chairman Bernanke continued his extraordinary run of public pronouncements, appearing in a rare national television interview, where he said that the Fed must be ready to respond to how the economy evolves and that it does not take any options off the table. On the 2014 low rates commitment, he says that this is the ‘best estimate’ – not a guarantee – of when the first rate hike would come, but his surrounding comment gave no reason to believe he thinks it could be sooner than this. Discussion of what is behind the recent media blitz includes suggestions that Bernanke is pre-selling QE3 to the public, or alternatively may be attempting to ‘talk down’ back-end yields – a rise in which would threaten any potential housing recovery. Either way, Treasuries have been the beneficiary, helped by a strong 2-year auction.
- Durable Goods Orders, Eurozone M3 and German CPI all of interest
With the Fed outlook being highly data dependent, today’s Durable Goods Orders report for February will be important. We know aircraft orders were strong last month and this should ensure a decent headline print (BNP Paribas and consensus both +2.9% after -3.7% in January) but interest should be on the sub-series, notably the ex-transport number. This fell 3% in January, and is only expected to bounce back by about half that (consensus +1.9%, BNP +1.4%). If stronger, then this should prove risk supportive and, we would gauge, USD supportive assuming this will at least partially reverse Tuesday’s bond market rally. Much weaker than expected numbers may bolster hopes for more QE, but are more likely to play USD negative. The other data points of particular note for Wednesday are Eurozone M3 and preliminary Germany CPI/HICP. If M3 growth is seen to have softened (BNP 2.1% 3m y/y from 2.2%) and German inflation falls back (BNNP 2.3% from 2.5% on the HICP measure) then this may reignite hopes that the ECB could yet ease again. We no longer forecast easing, but as with the Fed, the call is highly data dependent. Soft data on one or both counts could help EURUSD lower.
- Month/quarter/year end flows now in focus – hype and reality may diverge
Despite lower Treasury yields, USDJPY has held up well amid some speculation the BoJ could ease again at its April 9-10 meeting. The government today finalised the wording of legislation on raising the consumption tax – the bill must first be approved later in the week by the Cabinet and then by parliament, likely next month. Both steps will be problematic in the face of internal DPJ opposition and LDP politicking. But without progress on fiscal reform, we see little chance of further BoJ easing. Meanwhile, financial year-end flows have seen exporters selling today, but these remnants may well be outweighed by heavier importer demand and capital outflows into retail investment trusts. In the broader market, today is the last trading day for regular month/quarter-end settlement, and corporate fixing flows may dominate in what is still very low volume FX market and in the absence of bigger fundamental drivers. Any major month/quarter end hedge related or portfolio-rebalancing flows among financial institutions are more likely to wait until Friday, though to repeat, we suspect that in this case the hype (large scale equity selling/bond buying and hedge related flows favouring USD selling) will not be matched by the reality.
BNP Paribas