U.S. Dollar Pops To Start The Week

The US dollar caught a strong bid to start the week. The prospects that Yellen will keep the June rate hike in play after the FOMC minutes were seen as diminishing it may be lending to the dollar's support. Although US rates are only slightly firmer.

After testing $1.1400 in early Asia, the euro has returned towards the pre-weekend lows near $1.1280. Sterling has slipped through a similar low, though held above last week's low just below $1.5320. The Antipodean currencies and the Scandis, which were favored last week are buckling under the pressure of the dollar demand. The US dollar is busting through this month's downtrend line against the Canadian dollar; moving above CAD 1.26, after poor retail sales at the end of last week and heightened expectations of another rate cut early next month.

News that Greece was still preparing its list of measures it proposes to undertake in exchange for continued funding seemed to weigh on sentiment. The risk is that the list itself becomes the new negotiating front and that these negotiations may have a few more days to play out. That said, the risks of a Grexit or default appears to have been dramatically reduced.

While Greece's stock market is closed, the government's bonds are trading broadly higher. The 3-Year bond yield fell over 200 bp to three week lows. The 10-Year yield is off more than 60 bp to below 9%. Other peripheral European bond markets may not have shown much contagion from Greece, but do seem to be participating in a relief rally. Italian and Spanish 10-year yields are off 6 bp. Portugal's 10-year yield is off 9 bp and is flirting with US levels for the first time since 2007. Germany yields are firmer on a small unwinding of safe haven flows.

The main economic news today was the German IFO survey. It was mixed, but somewhat disappointing given the recent PMI and ZEW surveys. The IFO business climate and expectations showed modest improvement from January, but not as much as expected. The current assessment actually deteriorated slightly (111.3 from 111.7).

Minutes from the Bank of Japan's January meeting were released. There did not appear any great sense of urgency to provide more stimulus even though the decline in energy prices is weighing on inflation measures. Officials drew some comfort that medium and longer-term inflation expectations have been steady despite the drop in oil prices. At those meetings the BOJ cut was median forecast of the average inflation in the fiscal year beginning April to 1% from 1.7% (set in October).

Two ideas were floated by advisers to Prime Minister Abe. First, Etsuro Honda suggested that additional stimulus is not needed now. He suggested that last October's easing will take 6-8 months to filter its way through the economy. The BOJ has several months to see the impact before having to decide if new action is needed. In terms of the dollar-yen, Honda suggested a JPY 117-JPY 120 range is "comfortable" for the Japanese economy.

Second, Koichi Hamada, another adviser to Abe argued that the BOJ's credibility would not be damaged if it extended the inflation target from two years to three years, or lowered the inflation target to 1% from 2%.

The dollar has traded above JPY120 in four sessions this year—twice at the start of the year and twice earlier this month. Despite the ongoing reference to currency wars and competitive devaluations, Japanese officials have seemed to temper their desire for a weaker yen. While the BOJ continues to aggressively expand its balance sheet, the dollar peaked against the yen in early December.

Separately, we note that Japan's Farm Minister Nishikawa resigned, becoming the third cabinet resignation in the past six months. Allegations over political donations (JPY1 mln)--from the sugar industry as he negotiated tariffs as part of the Trans-Pacific Partnership trade deal. Sugar is one of five agricultural products Japan wants to exempt from the trade agreement.