Greenback Remains Heavy

The dollar initially extended its recent gains, pushed through the 200-day moving average (~JPY105.50), and reached almost JPY105.65 before reversing lower. A low a little above JPY105.25 was seeing in early European turnover. The JPY105.15 area is the first (38.2%) retracement of the leg up that began from around JPY104.40 on February 10. A close below JPY105.35 today would suggest a near-term top is in place. The minutes from the recent RBA meeting reiterated that officials see several years before the inflation and employment targets are met. Still, the Australian dollar extended its rally for a fourth session (and seventh in eight sessions) and briefly traded above $0.7800 for the first time in a little more than a month. The year's high was set on January 6 near $0.7820, which it had not seen since March 2018. Initial support is seen in the $0.7770 area. Meanwhile, the greenback rebounded from the CNH6.40-level approached yesterday. When the onshore markets closed for the holiday last week, the dollar settled near CNH6.4290 and is now near CNH6.4160.

Europe

Sterling is approaching our 2021 target of $1.40 quicker than we anticipated. It has fallen in only two weeks since the end of last October (15 weeks). While reasonable people may differ on the precise driver, there may be general agreement on what is not. The movement of goods between Northern Ireland and the rest of the UK has gotten worse according to the ONS latest survey (Jan 24-Feb 7), where 35% of those seeking to import from Northern Ireland faced difficulties compared with 25% in the prior survey (Jan 11-24). The survey found that 38% reported lower import volumes from Northern Ireland. The agreement struck at the end of last year is not even two-months-old, and already there are calls to abandon it.

Should software investment be considered part of a bank's core capital that can help absorb losses? At the end of last year, the European Banking Authority said it could, in part to respond to the competitive pressure from the US, which allowed similar treatment. The Bank of England's regulatory arm, the Prudential Regulation Authority, thinks otherwise and will not let UK banks do so. The consultation process with the industry has begun. It is seen costing the top 5 UK banks as much as 3.6 bln euros in relief. Some smaller banks, which had large IT projects, are also vulnerable, according to reports.

Germany's ZEW investor survey provided a mixed assessment. As one might expect, the current situation is not good, and investors believe it is deteriorating further. It fell to -67.3 from -66.4. This is the worst since last August. Last May was the bottom (-93.5). However, the expectations component defied expectations for weakness. It rose to 71.2 from 61.8. It is the strongest since last September (when it peaked at 77.4). The eurozone-wide ZEW expectations rose to 69.6 from 58.3. It is also the highest since last September's peak (73.4). This optimism is part of the basis on which the recovery is expected later this year. Meanwhile, Q4 GDP was revised to show a contraction of 0.6% instead of 0.7%, and separately, employment in the region rose by 0.3% in the quarter after a 1% increase in Q3 20. Lastly, Italy reported December trade figures. For all last year, Italy recorded a 70.6 bln euro surplus, a 25% increase over 2019.

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Read more by Marc on his site Marc to Market.

Disclaimer: Opinions expressed are solely of the author’s, based on current ...

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