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The US dollar is firm against most of the major currencies, but momentum is generally lacking and the broad consolidative tone remains intact. The chief exceptions are the Australian and New Zealand dollars. These cousins have been pulled in opposite directions by a less than hawkish RBNZ and stronger than expected Australian jobs data. Disappointing downward revision to Japan's January industrial output figures and confirmation by the lower house of the new BOJ management team weighed on the yen. The greenback has, thus far, been stopped shy of JPY96.70 high seen on Tuesday.

The Reserve Bank of New Zealand was widely expected to keep rates on hold, but what surprised the market was not just pushing a rate hike into next year, but the threat of a rate cut if the currency strengthens. Governor Wheeler also welcomed the New Zealand dollar's one cent loss that was sparked by the decision. The aggressiveness of Wheeler's comments took the market off guard. The $0.8200-25 area now offers resistance, while the next downside target is $0.8100.

Shortly after the RBNZ, Australia reported the largest jump in job creation in more than a dozen years. The 71.5k rise in employment was seven times more than the consensus called for and the January figure was revised to 13.1k from 10.4k. The Australian dollar took off, rallying almost a cent to approach $1.04 for the first time in a little more than a month. However, the momentum stalled and profit-taking saw the Aussie slip back to $1.0340 in the European morning. While the data is strong, we think the optics overstate the strength. Full-time jobs rose 17.8k, meaning the bulk of the jobs were part-time. It was the first increase in full-time jobs in four months. It is too early to draw any hard conclusions from one month's data. Few, if any, were looking for a resumption of the easing cycle in April.

Japan's January industrial production was revised to 0.3% from 1.0% after a 2.4% increase in December. Soft Japanese data weighs on the yen as it is seen strengthening the case of BOJ aggressiveness, which is getting closer. The lower house approved the BOJ's new leadership, which was widely expected. The challenge is in the upper house, which will vote tomorrow. The LDP does not have a majority there, but it appears to have sufficient support from opposition parties who see little reason to challenge the popular LDP government ahead of the summer election. We note that earlier in the week, local papers were reporting that the new BOJ Governor may not wait for the next regularly scheduled meeting to change policy, but may call an extraordinary meeting in as early as next week.

Weekly Ministry of Finance flow data showed foreign investors bought JPY1.12 trillion of Japanese equities in the week ending March 8. This is the highest weekly figure in nine years. It confirms what many fund managers have told us: although they have been buying Japanese shares, they are still underweight their benchmarks. With today's 1.1% gain, the Nikkei is up 19.1% this year, easily the best major performer. We note that smaller Japanese companies are likely to benefit from a weaker yen more so than large cap companies. Large business are more likely to have hedged and unable to take full advantage of the yen's weakness. The smaller cap JASDAQ market is up 36% this year.

Japanese investors have responded to the weaker yen by keeping more of their funds at home. However, in the past week, Japanese investors bought foreign bonds, snapping a 5 week selling spree. It is only the third week this year that Japanese investors bought foreign bonds. Some of the funds used to buy bonds were freed up by selling foreign shares.

The EU Summit begins today. Although it is not attracting much attention, we think there will be a subtle but important shift forthcoming. Thus far most of the focus is on the nominal fiscal position. The EU appears poised to shift its emphasis toward the structural budget. This is the fiscal position adjusted for the business cycle. This will provide the rationale for allowing several countries more time to adjust their cyclical deficits. EU officials have been gradually moving in this direction and working papers by the IMF showing that 1) the fiscal multiplier is greater than previously recognized and 2) that excessive austerity may generate higher rather than lower deficits, have been supportive of the shift.

Spain and Portugal are the most obvious candidates for an extra year. Italy is interesting. The political situation is far from clear, but the push back against austerity is palpable. Even Monti, who is attending his last summit, blamed his meager 10% showing in the polls to a backlash against cuts. The EU recognizes that the rules allow for increased public investment for countries with deficits below 3% of GDP. As we have noted, of all Italy's challenges, the budget deficit is not a significant issue.

France's request for another year grace period may be the most controversial. Some officials, and not just Germans, have argued that as a pillar of Europe, France needs to meet the 3% deficit target or risk undermining the euro area credibility. However, Hollande may be a beneficiary of the shift in emphasis toward the structural position. Merkel may also benefit for the shift as it may take some of the (limited) thunder of the SPD ahead of the fall election.

Source: Down Under Drives Calm FX Market