Dollar Firms Ahead of ISDA Decision, U.S. Jobs Report

NEW YORK ( BBH FX Strategy) -- The dollar is firmer against major and emerging market currencies. The euro failed to hold above the 100-day moving average around 1.3261 as the initial excitement from the PSI success faded, unable to break the 1.3291-retracement level from the February-to-March drop.

USD/JPY touched a nine-month high at 81.90, driven in part by Japanese importers selling yen. Periphery 10-year sovereign debt is little changed with the exception of Portuguese yields, which are down 15 basis points. The Euro Stoxx index is down 0.2% and S&P futures are flat.

Asian equities closed higher with the Nikkei up 1.6% to its best level since August 2011 and close to the key psychological level of 10,000, while the MSCI Asia Pacific was up 1.1%.

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The Shanghai index closed just off the highs of the day after February CPI in China fell to a 20-month low of 3.2% year over year. Hopes of further stimulus trumped less favorable data, including lower-than-expected new loans and retail sales. We still believe that the market is underestimating the amount of forthcoming stimulus.


The Greek government said PSI went through with a 95.7% participation rate after collection action clauses were activated. Before the CACs, however, that rate was only 85.8%. International Swaps and Derivatives Association's determinations committee will decide today at 8 a.m. EST whether a credit event has occurred, which given past comments suggest that it will be in the affirmative.

While it would be tempting to blame Friday's euro losses on classic buy-the-rumor-sell-the-fact action, we suspect concern about a credit event and the murkiness of the credit default swaps market is a major factor too, as recent market optimism likely reflected hopes that CACs would not have to be invoked.

EU leaders have moved the scheduled conference call to discuss giving the final approval of the second bailout for Greece to 8:30 a.m. EST.

As a reminder that the Greek story is by no means over, fourth-quarter GDP data was revised lower to -7.5% year over year from the -7.0% flash estimate. With the economy likely to contract sharply in 2012, budget targets will be almost impossible to meet this year. In related news, the European Union will send budget inspectors to Spain in response to that nation's upwardly adjusted budget deficit forecasts announced unilaterally last week.

We know from Draghi's comments Thursday that the European Central Bank does not plan to do LTRO 3, and that the ball is back in the courts of the governments to continue fiscal discipline. The debt crisis is by no means settled, with other potential shoes poised to drop in 2012.

Jobs data today will make things tricky, coming right near the ISDA decision and Eurogroup call. Consensus for February non-farm payrolls is a positive 215,000 vs. 170,000 in January. That would be consistent with continued improvement in the U.S. labor market.

The correlation between EUR and the S&P has been rising again, suggesting that a positive surprise in NFP could lead to some short-term EUR strengthening. The 30-day percentage change correlation between the two rose to 0.61, up from a recent low of 0.57 in late February, but still much lower than the high of 0.855 in December.

More broadly, however, eurozone stresses remain in play, meaning that the upside for the euro is likely to be limite. Note that the spread between two-year U.S. and German yields has continued to widen steadily in favor of the U.S. At 15 basis points, the spread between the two is now back to levels not seen since June 2010 as U.S. yields steadily move higher and Germany lower. While the 30-day correlation has shifted over time, we are for now back in the area whereby wider spreads in favor of the U.S. go hand in hand with dollar strength.
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