Soft CPI Sends Euro Low Then High; EONIA Rises

The euro zone CPI fell to 0.5% in March. The consensus had expected a 0.6% print after 0.7% in February. Initially, the euro sold-off, hitting $1.3725 before snapping quickly back to new session highs near $1.3795. News wires surveys found only a small minority (according to Bloomberg 3 of 57) expected an ECB rate cut and the data does not appear to have swayed many.

Officials had expected that cyclical factors, base effects and the drop in oil prices to produce a soft report. However, as much as ECB officials have touted the falling energy prices, the core rate fell to 0.8% year-over-year. It has not been above 1.0% since last August. There is a band of resistance that extends from $1.3790-$1.3810 that may be suffice to keep the euro in check in the North American session.

Part of the euro's recovery against the dollar was helped by the cross buying against the yen. The euro was pushed through the JPY142 level after trying in vain at least four times over the past two weeks. The yen weakened against the dollar as well. The greenback pushed through the JPY103 level for the first time in since March 12. Nearby resistance is seen near JPY103.45.

Earlier, Germany reported much better than expected February retail sales rose 1.3% on the month. The consensus had expected a a 0.5% decline after the a revised 1.7% gain in January (initially +2.5%). The year-over-year pace increased to 2.0% from 0.9%.

Month and quarter end pressures are lifting EONIA, which finished last week just below 20 bp. Although we have shown how the 2-year interest rate differential has moved to its widest since late 2012, we recognize that EONIA is more than twice the level of effective Fed funds. As recently as November, EONIA was below. In addition, foreign portfolio re-balancing has helped extend a dramatic run in European bonds, where Spain's 10-Year yield has fallen 88 bp this quarter, and Italy's 10-Year has fallen 75 bp. Portugal's 10-Year yield is off almost 190 bp to below 4%. Greece's 10-Year yield has fallen 162 bp and is now yielding 6.5%.

Another way to illustrate the dramatic interest rate developments: consider that the UK 2-Year yield (~73 bp) is finishing the quarter above the comparable Spanish yield (~68 bp). This is the first time they have crossed in five years.

Even the shellacking the French Socialists faced at the local polls over the weekend failed to impact the euro. While Hollande's Socialists managed to hold on to Paris, they lost widely. Le Pen's National Front did well, but an as well as some had feared after the first round. That said, it may still come in second in the French vote in May for the EU parliament. Hollande is expected to announce government shakeup. Prime Minister Ayrault and maybe Finance Minister Moscovici may join record unemployment queues.

Meanwhile, in Turkey the ruling AKP made a strong showing in the local elections, drawing around 46% of the vote. In the last municipal election in 2009, it won 39% of the vote. This helped lift the Turkish lira around 1.7%, the strongest of the emerging market currencies and briefly touching its best level since January 2. Thailand also went through elections (to select 1/2 of the Senate). The process was calm and nothing like the February 2 poll that was later annulled by the courts. The Thai baht gained about 0.2%, making it the third best performer in Asia, behind the Korean won (despite some heightened tensions with the North) and Malaysian ringgit.

The dollar-bloc, which seemed to be technically somewhat over-extended with the end of last week's gains, is consolidating today. The Reserve Bank of Australia meets first thing Tuesday in Sydney. There is little chance of a change in stance.

The North American session today features the Fed Chair Yellen's first speech since the FOMC meeting. She will be speaking around 10:00 am ET in Chicago. Late in the session the Fed's Andolfatto (vice president at the St.Louis Fed) will speak about virtual currencies. In terms of data, the Chicago PMI is the main highlight, though the Milwaukee's ISM and the Dallas Fed's manufacturing activity index are also on tap. Canada reports January GDP figures. A 0.4% increase is expected after a 0.5% contraction in December.