NEW YORK (BBH FX Strategy) -- The U.S. dollar is paring back some of its recent gains but continues to trade in tight ranges.The euro has recovered but stalled out just ahead of 1.33, a key level of resistance. A break of this level would likely open up a move toward 1.350, but we expect economic weakness in the euro zone and concerns about Spain to remain headwinds for the euro. For now, we remain in a 1.30-to-1.33 range. The Australian dollar is flat near 1.04, after declining for three consecutive days. The yen is also flat on the day, after rallying nearly 1% over the past five days.
Dollar-yen has found support for now just above 82. Weekly Japanese portfolio flow data show that Japanese investors have more than doubled their purchases of foreign stocks and bonds this year while foreign investors have cut in half their purchases of Japanese stocks and bonds. The most recent data was released earlier Friday and covers the week to March 17. There is some indication of Japanese repatriation ahead of the fiscal year end. Japanese investors were net sellers of foreign bills (JPY38.8 billion), equities (JPY57.8 billion), and bonds (JPY721.5 billion). Foreign investors bought Japanese shares (JPY287.5 billion) as they have done every week this year. On the fixed income side, they sold bonds (JPY1.07 trillion) for the first time in four weeks and parked the money in bills (JPY1.09 trillion). A move to bills makes investors more sensitive to yen movement. As a whole, Japan recorded net inflows of JPY1.13 trillion in the week to March 17 compared with a net outflow of JPY20.6 bln the previous week. This week the returns in the G10 were mixed but the China slowdown theme emerged as a key driver. AUD (-1.7% vs. USD) and NZD (-1.3%) were the week's two worst-performing currencies, thanks in part to the recent underperformance of Chinese data. Regional trade links remain strong enough that a slowdown in Asian growth would directly impact the Australia and New Zealand economies. In this regard, food exporter New Zealand is likely to be hurt less than resource exporter Australia. In addition, downside economic data surprises have also weighed on general market sentiment, with stocks and commodities slipping on the week. While the rolling 60-day correlation of AUD/USD and the S&P 500 has recently declined to .64 from a high of .92 in December, the 30-day has been rising to .71 from a trough around .55 back in early February. As such, a fairly strong relationship still persists. TRY is the best-performing currency amongst major emerging markets this week as hawkish comments offset Turkey's economic difficulties.