Dollar Stabilizes, but Likely a Sale

The U.S. dollar has come back bid Wednesday morning. It's nothing concrete to hang one's hat on, but gives the sense that Tuesday's moves were extreme.

Emerging market currencies are mostly firmer as well. Previously we had thought that today's session would be data driven and the asymmetrical risk of the data was to the dollar's downside, but given the outsized price action yesterday, and without compelling evidence that it is over, the focus is elsewhere.

Although the U.S. dollar has posted some corrective upticks in the wake of yesterday's slide against most of the major currencies, the pressure is not off of it. Today's news stream is likely to be negative.

Although it is often disregarded as "old" the revisions to fourth-quarter GDP could take on greater importance in the current environment. Growth appears to have been grossly over-estimated in the government's initial estimate of 3.5% growth. Owing to new data, including inventory, trade and construction reports, the consensus calls for a 2.3% reading. This will have knock-on effects, pushing productivity estimates lower and unit labor costs higher.

In the larger picture, the inventory cycle is perhaps the most important consideration and provided demand stays firm, the downward pressure from inventories will likely set the foundation for stronger growth. There is downside risk also emanating from the Chicago PMI. The consensus forecast is for a 50 reading after 48.8 in January. There is likely to be a bigger reaction if the Fed reading comes in below the 50 boom/bust level again than if it meets or exceeds the consensus forecast.

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