Capital Markets: ""Dollars Gains Extended"

From Marc to Market:

Overview: The five-day advance of the S&P 500 stalled yesterday and global equities are mixed today. Most Asian centers remain closed, Japan and some small markets were lower, while Taiwan, Australia, and India moved higher. The seven-day rally in Europe's Dow Jones Stoxx 600 is under threat today. Australia and New Zealand bond yields fell, while European bonds are little changed, Italian bonds are underperforming, In the foreign exchange market, the dollar remains firm against the major currencies, and the Dollar Index is extending its rally into fifth consecutive session, the longest since last September-October. Most emerging markets currencies are weaker. The Indian rupee is a notable exception. It is firmer even though the Reserve Bank of India surprised many with a 25 bp rate cut. The Bank of England meets, but not fresh action of guidance is expected.

Asia Pacific
The Australian and New Zealand dollars have fallen out of favor. After rallying on a hawkish central bank statement, the Australian dollar came under pressure when Governor Lowe signaled a neutral stance. New Zealand reported an unexpected strong rise in unemployment from a revised 3.9% (from 4.0%, which was a ten-year low) to 4.3%. Slower employment growth and a dip in the participation rate were also reported.

At his first meeting, the new Governor of the Reserve Bank of India surprised most observers with a 25 bp cut in the repo rate to 6.25%. Only about a quarter of the Bloomberg survey anticipated rat cute, though as we noted yesterday, inflation and growth have been weakening. The decision to cut was on a 4-2 vote, but the shift to a neutral bias was unanimous decision. Last week Prime Minister Modi unveiled a fiscal stimulus initiative (ahead of elections later this year). The combination of easier monetary and fiscal policies tends to be associated with a weaker currency. Counter-intuitively the rupee is trading higher for the third consecutive session, despite the unexpected rate move. The dollar had gapped higher on Monday and the losses over the past three sessions, saw the dollar fill the gap. The greenback finished last week near INR71.25. It is not a little above INR71.40.

The dollar remains in tight ranges against the yen, though is edging up for the fourth consecutive session. It may be running into option-related offers with a $1.1 bln in expiring options struck at JPY110.00. The Australian dollar has marginally extended yesterday's nearly 1.8% decline that brought it to $0.7100. The Aussie is straddling that area now. The low from the second half of January is was near $0.7075, which is the next immediate target, and a break may signal a move toward $0.7000-$0.7020. The New Zealand dollar's losses are also being extended. Strong support is not seen until near $0.6700. It finished last month above $0.6900.

Europe
Economic data from the EMU continues to disappoint economists' forecasts. Policymakers also continue to be surprised. The Bloomberg survey found median expectations for German industrial output to rise 0.8% in December and 0.4% in Spain. Instead, German industrial production slumped 0.4% and Spain's industrial output dropped 1.4%. Italy reported December retail sales fell 0.7%. The median guesstimate was for a 0.2% decline. After reporting that some sources close to the ECB saw a new loan facility as urgent earlier in the week, Bloomberg reported yesterday that other sources still needed to be convinced. Today's economic data coupled with the ECB's month bulletin, acknowledging weaker growth is part of the compelling evidence that we expected to continue to build. Officials will want to get the most bang for the buck, which means milking the announcement effect for as much as possible as well.

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