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Daily Commentary 12/03/15

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• EUR continues to collapse as USD broad currency index breaks out of 30-year downtrend.The euro continued its collapse yesterday as more and more market participants jumped on the trend. People were waiting to hear some comments from ECB officials about how enough is enough, the pace of decline is too much, or something like that, but ECB President Draghi, and ECB Governing Council Member Ewald Nowotny made no such comments. On the contrary, Nowotny said recent developments are not “totally unusual” and exchange rates “are not a major dominant factor” for the global economy. He said it would be wrong to frame the euro’s decline as a currency war. Italian Finance Minister Pier Carlo Padoan said the dollar’s appreciation vs the euro was in line with the economic fundamentals, so no complaints there. Meanwhile, St. Louis Fed President James Bullard said the Fed was already late in hiking rates. Monetary policy divergence lives!

• USD broad currency index breaks out of downtrend I highlighted in the past how the DXY index has broken out of its 30-year downtrend. Over the last several days, the same thing has happened to a much broader, more representative index of the dollar’s value, the Fed’s major currency trade-weighted index. This index includes Australia, Canada, Japan, Sweden, Switzerland, the UK and the Eurozone countries and is much more rationally weighted than the bizarre DXY index. The breakout here confirms to me that we are still at the start of a broad USD rally.

• RBNZ remains on hold The Reserve Bank of New Zealand kept interest rates unchanged and signalled an extended period of steady interest rates. Their emphasis was on growth, not inflation, which they indicated would not be a concern even if (when?) it falls to zero unless there started to be second-round effects on wages and prices. They were more optimistic than they were back in January about the New Zealand economy, which they said “remains strong,” a new addition to the statement. “Our situation is quite different from some of those countries that have changed monetary policy or cut interest rates,” Gov. Wheeler said at the press conference following the meeting. He noted that the New Zealand economy was growing at 3.25%-3.5% and is expected to continue to grow at those rates for the next two years. While they lowered their forecast for market rates, they signaled that they would keep the Official Cash Rate (OCR) steady for some time. “Our central projection is consistent with a period of stability in the OCR” they said, a slight change from January’s formula, “we expect to keep the OCR on hold for some time,” but the next part of the statement was identical: “However, future interest rate adjustments, either up or down, will depend on the emerging flow of economic data.”

• NZD strengthened after the report on the idea that rates would be on hold for some time and then eventually start to rise. Nonetheless, I think they could be signalling intervention in the FX market to weaken the currency. Their comment on the exchange rate was even stronger than it was in January: they added a sentence saying “A substantial downward correction in the real exchange rate is needed to put New Zealand’s external accounts on a more sustainable footing.” I see NZD depreciating vs USD but appreciating against AUD, which is more heavily leveraged to Chinese investment.

• RBA lowers AUD target RBA assistant governor Christopher Kent yesterday repeated the RBA’s mantra that AUD is still too high. “While the depreciation seen to date will be helpful, our assessment is that our exchange rate remains relatively high given the state of our overall economy,” he said. The comment was particularly significant because AUDUSD yesterday hit 0.7561, meaning it had reached the 0.75 level that RBA Gov. Stevens identified back in December as “an appropriate valuation” for the currency. I think Kent’s comments signal a change in view at the RBA, because the state of the economy and the outlook for the Australian economy have worsened since December. His comments tie in with a speech, Deputy Gov. Philip Lowe made last week in which he noted that monetary policy is less effective than it used to be, because of the high level of existing debt – a fall in rates does not elicit the same increase in borrowing that it used to and therefore does not boost growth as much as it did in the past. Reading between the lines of the two speeches, it appears to me that the Australian authorities expect that they will have to rely more on exchange rate depreciation in order to boost growth. This is why I remain particularly bearish on AUD.

• Today’s highlights: German final CPI for February came at -0.1% yoy, unchanged from the preliminary estimate, as expected. Eurozone’s industrial production for January is also coming out.

• In Sweden, the official unemployment rate for February is expected to decline, in line with the PES unemployment rate released on Wednesday. Following the encouraging CPI data, decline in the unemployment rate could suggest an improving economy and support SEK temporarily.

• In the UK, trade deficit for January is expected to narrow a bit. The BoE also publishes its quarterly bulletin.

• In the US, headline retail sales for February are forecast to have rebounded after falling in January, while the core retail sales are expected to accelerate. The focus is usually on the core retail sales, which excludes auto and gasoline, thus the report could add to the greenback’s strength. Initial jobless claims for the week ended March 7 is also coming out.

• As for the speakers, RBNZ Governor Graeme Wheeler speaks at the Finance and Expenditure Select Committee on monetary policy statement. ECB Executive Board member Benoit Coeure, ECB Governing Council member Jens Weidmann speak, while Bank of England Governor Mark Carney speaks for the second time this week.

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