Dollar Could See More Weakness Next Week

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Midday Market Drivers for March 15, 2013
U of M misses badly sending USD/JPY through 95.50
Euro mildly bid as tone from EU Summit less austere
Dow -0.34% Europe -0.69% Nikkei 1.45%
Oil $93/bbl
Gold $1591/oz.

Europe and Asia:
EUR Euro-zone CPI 1.3%

North America:
USD CPI 0.7%
USD Net Long-term TIC Flows 25.7B
USD Industrial Production 0.7%
USD U. of Mich Confidence 71.8

The dollar hobbled to a lower close for the first week in six as weaker US consumer confidence data and a short covering rally in the euro on hopes of a more accommodative fiscal stance in the Eurozone sent the greenback lower against most of its G10 counterparts.

USD/JPY slid to a low of 95.07 after the U of M Consumer confidence survey shocked the market with a much lower than expected print. The index fell to 71.8 from 77.6 the month prior as sentiment plunged amidst concerns over the sequester and the hike in the payroll tax which finally hit the worker’s paycheck in February.

This was the first negative surprise for the US economy in more than a week suggesting that some of the headwinds that the bears have been talking about are finally starting to materialise. Although the U of M survey is not always an accurate gauge of consumer behavior, today’s data point does indicate that demand may have slowed as Q1 progresses.

USD/JPY which failed to take out the highs yesterday despite positive news from US and the confirmation of BOJ Deputy Governor Iwata, fell further today as profit taking dominated North American trade. With the BOJ team now in place, the time for rhetoric is over and the market will want to see some clear action before bidding the pair to fresh highs. Therefore, its likely that USD/JPY could slide further towards the 94.00 figure as next week progresses.

Meanwhile the EUR/USD continued its recovery hitting a high of 1.3107 before correcting towards 1.3050. Euro perked up in morning European trade rising above the key 1.3050 level as commentary from EU summit downplayed austerity and focused more on growth encouraging investors to plow back into currency. The recovery in the pair which started during yesterday’s North American session extended in today’s European dealing as sentiment towards the euro improved.

Both France and Italy insisted on a more flexible approach with respect to fiscal budgets and won what was view as concession when Germany did not formally object to their request. Indeed Angela Merkel avoided any clash with France, telling reporters: “We made clear in a very consensual discussion that budget consolidation, structural reforms and growth are not in contradiction but are mutually reinforcing.”

European leaders are beginning to realise that a policy focused solely on austerity is failing miserably both an economic prescription and as a political stance. The election in Italy made it abundantly clear to the politicians that the citizenry of Europe will not tolerate any further deficit cutting until economic conditions show a modicum of improvement. Therefore the more accommodative posture by the EU summit suggests a small but significant shift away from austerity towards more growth oriented solutions.

The uptick in EUR/USD is very much reflective of this optimism by investors that the region could begin to recover from the severe contraction that has plagued it since Q4 of last year. The rebound rally in the EUR/USD could take it towards the 1.3100 level but any further progress may be slow as the pair faces strong resistance above that figure.

Next week shapes up as a crucial test for the currency with a slew of key economic reports on the docket including ZEW, Flash PMI and IFO. If the data begins to show some improvement then the recovery thesis could take hold and the EUR/USD could rally towards the 1.3300 level as the week proceeds.

Boris Schlossberg
Managing Director

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