Dollar Pulls Back Ahead Of FOMC Meeting

The dollar index breached 83 level last week, reaching as high as 83.17, but failing to hold on to its gain. Instead, selloffs on Friday pushed the dollar to close the week lower against all other major currencies. The equity markets saw the DOW jumping to another record high again, but closing slightly lower at 14514. Nonetheless, the DOW did close the week higher. Meanwhile, 10 year yield spiralled lower and finally gave up 2% level to close at 1.996%. The markets were cautious ahead of this week's FOMC meeting and more importantly, the Fed will release new economic projections.

The dollar has once more been strong, together with equities. Sentiments were driven both by hope for sustainable growth, as well as continuous stimulus from the Fed. It should be noted again that Bernanke and Yellen have both said recently that stimulus would remain in place for a while. Based on the current economic outlook, there is little chance for the Fed to expand a stimulus program that is dollar supportive. Continuing the stimulus while economic momentum improves does support stocks. If markets are pricing in the Fed's stimulus removal, stocks wouldn't have the strength they currently have. The dollar's strength should be driven by the attractiveness of dollar-denominated risk assets, rather than Fed policy outlook.

To extend the recent up trend in both dollar and stocks, markets will need to see all these factors in the FOMC statement and projections. First, that includes upward revision in growth forecast. Secondly, inflation projection should be left relatively unchanged. Third, the Fed should maintain the stance to keep policy stimulus in place for a while. Deviation from these would rock the markets.

Technically, the dollar index lost a great deal of momentum last week. The EUR/USD and GBP/USD pairs looked bottom in near term. Meanwhile, the USD/CHF and USD/CAD looked topped. We recommended to shift from EUR/USD and GBP/USD shorts to USD/JPY, but that didn't yield any results as the USD/JPY dipped with the treasury yield on Friday. The clearer trend is seen in the AUD/USD, which was boosted by strong employment data last week. It looks as if AUD/USD's fall from 1.0597 has completed, and the pair is heading back to 1.06 resistance zone. We'd prefer to go AUD/USD long this week for a take on 1.06.

In Europe, Fitch downgraded Italy's sovereign debt rate to BBB+, down from A-, assigning a negative outlook. The rating agency noted that "the increased political uncertainty and non-conducive backdrop for further structural reform measures constitute a further adverse shock to the real economy," and warned that "the ongoing recession in Italy is one of the deepest in Europe." ECB said that 20 banks will repay EUR 6.82b of three year LTRO loans next week. Five banks will return EUR 0.385b loans from the first LTRO. Fifteen banks will repay EUR 6.43b from the second LTRO. By then, the total amount repaid will reach EUR 235.b, or 23% of total lending. The ECB also said that it will need to add 800 staffers to its 1500 strong workforce by July 2014 in order to carry out the responsibilities on banking supervision.

The Japanese parliament finally approved three policy doves to head BoJ. The upper house gave green lights to Kuroda as BoJ governor while Iwata and Nasako were both approved as deputies. Kuroda pledged earlier this week that he would do "everything possible" to end the 15 year long deflation. Outgoing BoJ governor Shirakawa said that "achieving the 2% price target is an important duty for the BOJ," but declined to comment whether the central bank could achieve it in two years. Former vice finance minister of Japan Sakakibara is also doubtful whether the BoJ could reach the 2% target. He noted that even during Japan's upward growth swing between 2002 and 2007, prices still went down. He said it will be "extremely difficult to get out of deflation. Meanwhile he also criticized that incoming BoJ deputy governor Iwata is "a little too extreme" and will be "watered down by Kuroda".

BoE governor King said that the central bank didn't try to depreciate the pound, but emphasized that "markets determine the level of exchange rate". He also noted that "without the fall in the exchange rate that occured before the crisis to now, our export industry would not be growing as it is and unemployment would be a good deal higher." He's optimistic that economic recovery in UK is "in sight".

SNB left the 3-month LIBOR target at 0-0.25%. Policymakers also pledged to maintain the minimum 1.20 EUR/CHF exchange rate with utmost determination. The central bank continued to express concerns about CHF strength, and stated that they would 'take further measures at any time" should conditions require.

The job market in Australia grew an impressive 71.5k in February versus expectations of 10k. That was the biggest rise since 2000. The prior month's figure was revised up to 13.1k, from 10.4k. Data came in strong with gains in both part-time and full-time jobs, by 17.8k and 53.7k respectively. Participation rate also rose to 65.3%. The unemployment rate was unchanged at 5.4% versus expectation of a rise to 5.5%. The RBA mentioned that current rate is appropriate, but inflation outlook allows for further cut, should the economic situation make it necessary. Based on the solid job market data, there shouldn't be much need for the central bank to cut rate any time soon.

The Kiwi slumped after a dovish RBNZ statement which signaled that uneven recovery in New Zealand's economy would lead the central bank to maintain the OCR unchanged for the rest of the year. Policymakers even warned of rate cut should the currency appreciate excessively. Meanwhile, the central bank warned that it 'does not want to see financial stability or inflation risks accentuated by housing demand getting too far ahead of supply'.

In China, the report from National People’s Congress suggested that the government forecast the economy to grow +7.5% this year with M2 money supply and fixed asset investment rising +135 and +18% respectively. Despite concerns over measures to curb property prices, oil demand would remain well-supported by resilient manufacturing activities. The NRDC has planned to increase the transparency and responsiveness of domestic fuel prices adjustment to instantly reflect changes in international oil benchmarks. There have been proposals to remove the 4% crude price change threshold and the observation period of 22 working days. The last time the NDRC adjusted fuel prices was February, when gasoline and distillate prices were raised by +3.2% and +3.4% respectively. Over the past 12 months, it has raised and cut fuel prices 4 times seperately.