Dollar Firmer Amid Global Growth Concerns

NEW YORK ( BBH FX Strategy) -- The U.S. dollar is broadly firmer amid rising concerns about global growth. Japan fiscal year-end repatriation flows may be playing a part in yen gains, but there appears to be upward yen pressure coming from the EUR and AUD crosses too. Immediate support is seen near the recent low near 82 followed by the March low near 80.60.

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A widening of periphery spreads and negative news developments are weighing on the euro ahead of the North American open. Portuguese yields are higher, with the 10-year up 7 basis points after Fitch said Portuguese banks are on shaky ground.

Italy's 10-year is up 10 basis points despite the positive results from Italy's debt auction. AUD is testing the recent low near 1.033 following comments from Treasurer Swan that indicated spending cuts will be required in order to meet budget goals. Speculation of an RBA rate cut next week and ongoing China concerns are also weighing on the currency.

UK data, including Nationwide HPI mortgage lending, mostly missed consensus expectations but sterling remains resilient.

Asian stocks were broadly lower following the negative close on Wall Street. The MSCI Asia Pacific Index is down for the second day, led by losses in China and Taiwan. European shares are down for the third straight session. The EuroStoxx 600 is currently down 0.8% with bank shares down 1.4%.

Japan and the Yen

Recent yen strength is notable. There has been talk of FY-end repatriation flows in recent days, but other developments are in the mix. The Minister of Finance said policymakers will extend foreign-exchange-market monitoring to June 30.

We note that there were no concerns voiced about volatility when dollar/yen was gapping up from 76 to 84 in a little over a month, but now official concerns are rising about the pace of the yen's recent advance. The ruling Democratic Party of Japan has drafted a plan to double the sales tax to 10% by 2015 from 5% after fierce debate, and the cabinet will submit the bill to the ongoing ordinary Diet session. Some opponents in DPJ and Shizuka Kamei, the leader of People's New Party (the ruling coalition partner), strongly disapprove of the bill and threatened to break away from coalition.

However, it appears that most in DPJ will follow Prime Minister Yoshihiko Noda ahead of potential general elections and the bill is likely to pass the lower house. LDP and Komei, which lead the upper house, oppose the bill but Noda said he would dissolve the Diet if the bill is the voted down in the upper house.

Japan's February retail sales came in stronger than expected, up 2% month over month. This will give more confidence to those that want to hike the tax. However, the move to raise the sales tax is risky, as seen by Japan's experience in the 1990s when a consumption tax hike nipped an economic recovery in the bud.


European finance ministers meet Friday and Saturday. There appear to be five main issues that will be on the agenda. The one that has been in the news most recently is the likely agreement to allow the European Financial Stability Facility (a guarantee program) and the European Stability Mechanism (actual financial commitment) to run concurrently for about a year and thereby strengthen the firewall.

Investors seem not to be overly impressed. It still falls well shy of the shock and awe level. We continue to look for euro downside despite its recent resilience. Support near 1.32 and 1.3150 needs to be broken to open up a move back to 1.30.

South Africa

February PPI data out of South Africa came in higher than expected at 8.3% year over year, which serves to emphasize the difficult position the South African Reserve Bank finds itself in as it announces its rate decision later Thursday. Forecasters unanimously expect the bank to stay on hold at 5.5% with no change in rates for the next several months.

Inflation in February was welcome news for the bank, falling more than expected to 6.1% year over year from 6.3% in January. As the data Thursday show, little relief from price pressures should be expected. The Bank can no longer count on the prospects of more positive inflation pass-through from imported items, in our view, since the best of the rand's performance is behind us. So for the time being, inflation remains too high for easing and growth too weak for tightening.

USD/ZAR has been roughly tracking the 200-day moving average higher in recent days, now around 7.65. Recent highs around 7.75 will offer some resistance for USD/ZAR, but a break would target the mid-Feb high around 7.88.

We see no South Africa-specific factor on the horizon that could lead to a decisive break either way, so the rand is likely to be at the mercy of the global risk environment. However, Wednesday's move by S&P to cut the rating on its BBB+ rating serves as a reminder that South African fundamentals are deteriorating.
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