Fed Policy Still a Huge Influence on Dollar

February 21, 2017

The dollar appreciated broadly after the three-day U.S. holiday weekend despite ongoing worries aboutĀ U.S. policies and strong preliminary February purchasing manager survey results for Euroland and Japan. The prime dollar mover came from remarks by Philadelphia Fed President Harker that a rate increase is possible as soon as the FOMC’s March meeting.

Dollar overnight gains amount to 0.7% against the euro, Swissie and kiwi, 0.5% relative to the yen, 0.4% versus sterling and the Australian dollar, and 0.3% vis-a-vis the loonie.

Euroland’s composite and manufacturing PMI scores jumped 1.6 and 0.3 points to 70-month highs of 56.0 and 55.5, while the service-sector purchasing managers index printed at a 69-month high of 55.6, 2.9 points above January’s reading. The data suggest GDP expansion of about 0.6% this quarter. The German composite PMI, 56.1, was at a 34-month high but was exceeded by the French composite PMI score of 56.2, a 69-month high. Both German and French growth this quarter appear to be falling between 0.6% and 0.7%, not annualized.

Japan’s preliminary PMI in manufacturing advanced 0.8 points to a 35-month high of 53.5 and embodied record high business expectations. Order backlog are finally expanding again.

The Greek government agreed to terms with its creditors at the EU and IMF that will enable continuing aid and avert a debt crisis next quarter.

The Bank of England’s top economist warned that a possible upturn in investor expectations about the central bank rate would likely tighten U.K. credit conditions unduly.

The far-right candidate in France’s presidential elections, Le Pen, has widened her lead according to latest opinion polls. Although she still lacks enough support to put her over the top in the second round, momentum and time are on her side.

Among 10-year sovereign debt yields, there’s been a 32-basis point drop in Greece thanks to the aforementioned deal with creditors, but yields are up 5 basis points in Italy and Spain, 4 bps in France, and 3 bps in Germany and Britain. The 10-year Treasury futures yield is trading 4 bps higher at 2.45%.

Japan’s Nikkei rose 0.7%. Equities gained 0.9% in South Korea, 0.4% in China and India but slipped 0.5% in Hong Kong. Among European bourses, stocks have climbed 1.0% in Greece, 0.6% in Germany, 0.5% in Italy, 0.4% in Switzerland, and 0.3% in France. The British Ftse is down 0.1%, however.

WTI crude oil (+1.6%) and industrial metal prices are higher, whereas Comex gold is down 0.6%.

Japan’s all industry index fell 0.3% in December, trimming the 12-month increase to just 1.2%. The all-industry index, a supply-side proxy for GDP, rose 0.3% in the fourth quarter and 0.5% in 2016, matching its rise in 2015.

In the year to January, Japanese supermarket sales and department store sales respectively fell by 1.6% and 1.2%. Those were smaller than the 12-month drops in December.

Minutes from the last Reserve Bank of Australia policy meeting that made no change to the Official Cash Rate stressed that the interest rate may need to stay low for longer than imagined before because GDP has grown more slowly than assumed. Officials remain worried that any appreciation of the Australian dollar would complicate the ongoing economic adjustment away from reliance on mining sector investment.

Switzerland’s trade surplus almost doubled between December and January, reaching CHF 4.73 billion last month. Compared to a year earlier, imports fell 6.8%, while exports rose 2.3%. Swiss M3 money exceeded its year-earlier level by 2.9% in January.

The British public sector net surplusĀ in January of GBP 9.4 billion excluding banking groups was the largest for the month of January in 17 years but still fell short of investor forecasts. The budget tends to be in surplus during January. The fiscal year to date running deficit of GBP 49.3 billion has been 21.6% less than a year earlier.

Revised French CPI data for January show inflation of 1.3%, double the 0.6% posted in December. The energy component exceeded a year earlier by 10.6%.

Irish consumer prices in January were 0.3% higher than a year earlier. Cyprus’s inflation rate was at 0.7% last month. Finnish seasonally adjusted unemployment of 8.6% was down 0.1 percentage point from 8.7%.

General McMaster has been chosen by President Trump to be his second national security adviser. He replaces Flynn, who lasted just 24 days in the role.

Copyright 2017, Larry Greenberg. All rights reserved. No secondary distribution without express permission.

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