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Summary

  • Weidmann keeps door ajar to QE and negative rates.
  • German sentiment - this is the best it gets.
  • Focus on Emerging Markets.

The US dollar is little changed against the major currencies compared with yesterday's late NY levels. The late afternoon seemingly inexplicable dollar drop has not spurred follow through activity as much as increased the sense of near-term uncertainty. The euro has seen those gains pared back in the European morning.

Other markets are not giving much impetus either, with most bond markets little changed. European equities are mostly higher with the Dow Jones Stoxx 600 up about 0.65%, led by basic materials and consumer goods. Asia was narrowly mixed, and the MSCI Asia-Pacific Index is unchanged.

The dollar-yuan was fixed lower for the second consecutive session and the greenback tested last week's lows near CNY6.17 before rebounding back above CNY6.20. Money market rates rose for the ninth consecutive session today. It continued to drain liquidity from the banking system.

Meanwhile, the Russian rouble and equity market are advancing today. At the day's lows near RUB35.6560, the dollar was at one month lows against the rouble. While the Financial Times is playing up the government's estimate of capital outflows expected in Q1 ($65-$70 bln), Russian equity ETFs are reportedly drawing in funds. There is some talk that leveraged players were short the MICEX and are covering. Separately, some demand for the rouble seems to be stemming from the corporate tax dates (today for the mineral extractive tax and March 28 for the regular corporate tax). All told it is projected to be near the equivalent of $16 bln.

Two other emerging market currencies are on the radar screens today. First, the Indian rupee rose to 7-month highs against the dollar. Optimism ahead of next month's election is running high. Foreign investors have bought an estimated $3.5 bln of Indian bonds and stocks this month. Second, the Brazilian real will be watched closely today following S&P's downgrade to BBB- from BBB. It cited high debt, slow growth and little scope for policy adjustment given the election cycle. The US dollar closed near BRL2.3230 yesterday, which was the sixth day of lower lows for the greenback, which is not at the lower end of a 5-month trading range.

In Europe, the German IFO is consistent with recent survey data that picks up sentiment suggesting that while many are experiencing good times, this is the best is gets, they fear. This is reflected in a high current assessment (115.2 from 11.4 and above the 114.5 consensus) and the decline in expectations (106.4 from 108.3 and below the consensus 107.7). The Russian sanctions and general cooling effect seems to have only added to this angst.

The UK February inflation report was spot on with forecasts with the headline rising 0.5% and the year-over-year rate easing to 1.7% from 1.9%. This represents a 4 1/2 year low. Separately, the PPI data was softer than expected. Input prices fell 0.4%. The consensus was looking for an increase of almost this magnitude. Output prices were flat and were expected to have increased by 0.2%. Neither sterling nor the UK money market rates were impacted by the report.

Perhaps the most notable development in Europe were comments by the Bundesbank's Weidmann, who seemed to have done his part to nip the euro recovery that pushed it to session highs near $1.3850. He indicated that what we have called the ECB's nuclear options remain viable. He said QE could not be ruled out (not "generally out of the question") and that negative rates were more appropriate to curb euro strength. We have suggested that a version of QE that buys foreign bonds may be a way the ECB can pursue a more expansionary monetary policy, which some euro area members advocate as does the IMF, while staying within its mandate.

Separately we note that the verbal intervention has been stepped up by European Council President Van Rompuy and EU Commissioner for Industry Tajani. The former argued for the interests of exporters while the latter specified $1.40 as too strong. The euro came off but remained above $1.38.

The US reports January CaseShiller House Price Index and February new home sales. The March Richmond Fed survey, like the other regional surveys, are picking up some recovery in the US after a very poor start to the year. This week's Treasury sales kick off with $32 bln of two-year notes. There will be a little over $100 bln in supply this week. Meanwhile, comments from Fed officials will be looked at through the prism of last week's FOMC meeting and Yellen's comments. Lockhart (non-voter) and Plosser (voter) speak today. Also near midday in New York, Draghi is speaking and given his recent comments and ahead of next week ECB meeting, investors will be sensitive to his comments.

Source: Euro Slips, But Focus Elsewhere