Dollar Remains Range-Bound

NEW YORK (BBH FX Strategy) -- The U.S. dollar is trading within Monday's ranges against the major foreign currencies Tuesday. The main exception is the Australian dollar, where the central bank kept rates on hold, but encouraged the market to look for a rate cut next month.

The unwinding of long AUD cross positions helped lift the yen after the Bank of Japan reported the first decline in its monetary base in three years. The dollar fell to its lowest level against the yen in nearly a month, with reported purchases by Japanese importers helping to steady the greenback near JPY81.50. This, in turn, helped the other main yen crosses recover from earlier losses.

The yen's strength weighed on the local share prices and the Nikkei shed 0.6%. The inverse correlation (60-day rolling on percent change) stands at -0.35, which is the strongest inversion since late November 2010. There have only been a handful of times since 1990 that the inverse correlation has been greater than it is Tuesday. The regional benchmark, the MSCI Asia-Pacific Index, rose about 0.3%.

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News that China official nonmanufacturing purchasing managers' index rose to 58 after a sharp upward revision to the February series (from 48.4 to 57.3) helped the regional currencies. Chinese markets are closed through Wednesday, but the combination of the stronger official manufacturing and non-manufacturing PMIs should help boost confidence in the soft landing scenario.

The head of the National Development and Reform Commission indicated that Q1 GDP, which will be released in about 10 days, is likely to be near 8.4%. The consensus was for 8.3%.

The Reserve Bank of Australia left rates steady at 4.25%. Yet the better Chinese data and the disappointment to those that had expected a cut Tuesday did not spark rally in the Australian dollar. If anything, the RBA statement simply increases the market's anticipation for a rate cut next month. It will take an upside surprise to the consumer price index figure due April 24 to dash such expectations.

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