NEW YORK (BBH FX Strategy) -- The U.S. dollar is broadly higher against most of the major and emerging market currencies amid concern that the Greek PSI will not see sufficient participation to avoid the triggering of the collective action clauses or worse.At the same time, the downgrade of China's growth forecasts and the softer service sector Purchasing Managers Index, released Monday, continue to take a toll. The strength of JPY and USD appear to reflect short-term participants bracing themselves for disappointing developments in the coming days.
While there has been much speculation that Long Term Refinancing Operation funds will be used in Europe as either a liquidity cushion or to buy local sovereign debt, there is increasing talk that some of the funds are being swapped into dollars. This left U.S. banks, often the other side of the swap, long euros and there is some speculation that those euros are being hedged or otherwise offset. Sterling is posting an outside down day. This means that it has traded on both sides of Monday's trading range and a close below Monday's low (~$1.5786) would be a reversal pattern. The break of the $1.5780 area warns of the risk of a deeper setback. Initially the $1.5720 area may prove sticky, but there is near-term potential extends toward $1.5600 to $1.5640. Last week, sterling closed above its 200-day moving average for the first time since last August, but this proved, with the benefit of hindsight, a bridge too far. This area, roughly $1.59, will likely serve as resistance. The dollar is at three-day lows against the yen and this seems to reflect cross-rate adjustments more than a dollar move. In particular, Japanese investors have reportedly been keen sellers of the Australian and New Zealand dollars today. The Reserve Bank of Australia left its cash rate on hold at 4.25% as widely expected. Its statement read much like last month's, with rates currently appropriate and global risks emphasized. The Australian dollar is trading below $1.06 for the first time since the start of February. The softer Chinese official service PMI reading and the lower official growth forecasts appear to have encouraged a bout of profit-taking on the Australian dollar, which had been looking a bit tired after being unable to make much headway above $1.08 after repeated attempts. The dollar found support near JPY80.80. The JPY81.20 to JPY81.40 area may now act as resistance. There are no U.S. economic reports today, but Canada reports the IVEY PMI. The consensus calls for a bit of slippage from the 64.1 reading in January. The Canadian dollar is softer, but holding up better than the other dollar bloc currencies today. Still, the Loonie is trading near parity for the first time in about a week. Dollar spikes toward CAD1.0050 may be sold as investors take a more constructive view of North America.
The early call is for a third consecutive month of 200,000-plus U.S. non-farm payrolls on Friday. Brazilian Q4 GDP came in close to expectations rising 1.4% year over year, down from 2.1% last quarter. Still, 2012 data suggest a bit of a pickup ahead. Previous rate cuts and credit easing measures seem to be having some effect. As such we see no need for the central bank to accelerate its pace of easing from an economic perspective, but we recognize the political pressure for doing so. The bank meets March 6 and 7. Analysts are split between 50 and 75 basis points, while the swaps market is pricing in a significant chance of a 75-basis-point cut. So it would seem that regardless of the Monetary Policy Committee's decision, someone is going to be surprised.