NEW YORK (BBH FX Strategy) -- The U.S. dollar is broadly firmer against the major currencies to start the week, but it remains well confined to ranges seen at the end of last week.The market lacks conviction after shrugging off the disappointing European flash purchasing managers' index reports last week. Even though Italian and Spanish bonds are firmer Monday, outperforming Germany, we detect a deterioration of conditions in Europe and are concerned about a flare-up in tensions after the market gets through the quarter-end portfolio adjustments. Follow TheStreet on Twitter and become a fan on Facebook. Today's developments include a better-than-expected German IFO business-climate-index reading (109.8 vs. consensus 109.6) and an increase in Italian consumer confidence (96.8 in March, the highest since last July, from 94.4 in February). There are also signs that Germany will relent at the finance ministers meeting at the end of the week and allow the European Financial Stability Facility and the European Stability Mechanism to run simultaneously. The increase, however, will likely be temporary and once the EFSF expires in the middle of next year the available bail-out funds will be limited again to the money set aside for the ESM.
In Europe, one of Germany's smallest states, Saarland went to the polls. The Social Democratic Party (or SPD) and Left Party recorded more votes than the Christian Democratic Union (CDU) and its ally the Free Democrats, but the SPD ruled out a coalition with the Left Party and will most likely form a grand coalition with the CDU. There are additional state elections in May, with NRW, the most populous state, on May 13. In Frankfurt, the SDP looks to have ousted the CDU for the first time in 17 years. The real loser in the weekend contests were the Free Democrats and this increases the likelihood that next year's national elections will also result in a return to a grand coalition. In Spain, Prime Minister Mariano Rajoy's People's Party failed to secure a majority of seats, which most likely leaves the Socialists and its United Left ally in control with 59 of the 109 seats in the Andalusia regional election. This may complicate Rajoy's efforts to rein in the regional spending. Note that Thursday Spain will see its first general strike since November 2010. Second, the CFTC Commitment of Traders data shows a sharp reduction of the net short euro, yen and sterling futures positions. However, in both the euro and yen's case this was a function of new speculative longs being established rather than shorts being covered. In the week through March 20, the net short euro position fell by about 16,000 contracts, with new longs rising 10,000 and shorts falling by about 6,000. The net short yen position was cut from 42,400 to about 25,800 contracts. New longs rose 12,500 while shorts were reduced by a little less than 4,000 contracts. Sterling was on only one of the majors that experienced genuine short covering. The net short position was slashed to 15,800 from 41,800, which is the smallest since last September. Shorts were reduced by 22,000 and the longs added around 4,000 contracts. Third, this week's U.S. economic data is expected to be fairly strong; featuring a recovery in durable goods orders (~3% after a 4% decline in January), an upward revision to fourth-quarter 2011 GDP to something closer to 3.3% to 3.5%, helped by stronger consumption, especially of services, and strong income and consumption data for February. At the same time, Bernanke's speech Monday to business economists will be his first opportunity to address the expectations that have lifted U.S. yields in recent weeks. Fourth, a number of emerging market central banks meet with week, including Turkey, Israel, Hungary, South Africa and Czech. On balance, we do not expect a change in policy. If there is a surprise, it could be that Turkey narrows their operating rate band.