NEW YORK ( BBH FX Strategy) -- The U.S. dollar maintains broad firmness ahead of Tuesday's release of retail sales and the FOMC meeting. Even with the Greek PSI event risk out of the way, the focus on CDS payouts and the many central bank meetings this week should provide enough uncertainly to leave investors on edge despite the positive news on U.S. employment last Friday.
The fiscal compact has just been signed and promises greater fiscal discipline. If the EU backs down, it loses credibility and calls into question the fiscal compact itself. All this uncertainty should limit euro upside and keep markets on track to test the 1.2974 February low.
People's Bank of China Governor Zhou Xiaochuan confirmed our view that there is "lots of room" for reserve requirement ratio cuts but that they should not be seen as monetary policy easing. Consistently, stocks were little changed on the day but SHIBOR rates came down as the 14-day SHIBOR rate fell below 3% for the first time since May 2011. The data also supports our view that the underlying dynamics for CNY are changing. We still expect appreciation to continue, but mostly through the real exchange rate given higher inflation and especially wage growth in China vs. its trade partners. We do not expect any material appreciation this year, but we also doubt CNY will be allowed to depreciate much either, staying basically flat in nominal terms. USD/CNY fixed almost 0.25% higher overnight, the largest one-day move this year, but is still trading within recent ranges.