Dollar Gains Initially Extended, But Now Awaits US Leadership

The UK reported softer than expected CPI readings and a stronger than expected preliminary PMI. Owing to a sharp decline in clothing and footwear, the UK's preferred measure of consumer prices, which includes owner-occupied housing costs, CPIH slowed to 0.7% from 0.9%. Economists had anticipated an increase. The CPI rose 0.1% in February, rather than that 0.5% projected, and follows a 0.2% decline in January. Gasoline and diesel prices rose, leaving the core rate up 0.9% from a year ago. It was at 1.4% in January. Lower prices are probably more noise than signal in the UK, and the BOE has warned to expect an energy-led increase in prices this year. The base effect also points to upward pressure over the next three months. Producer output prices rose more than expected, and input prices were in line with forecasts. The flash PMI manufacturing PMI rose to 57.9 (from 55.1). This is above last year's high set in December at 57.5. The service PMI jumped to 56.8 from 49.5. Last year's high was set in August at 58.8. The composite stands at 56.6, up from 49.6. 

The euro has steadied in the European morning after falling to almost $1.1810 in late Asian turnover.  Resistance is seen in the $1.1850-$1.1865 area. The upper end corresponds to the 200-day moving average, which the euro closed below for the first time since last May. We have suggested that the double top pattern (~$1.1990) projects toward $1.1770. Sterling sold off hard yesterday (~0.8%), its biggest drop this month. It is still heavy today, which would be the fifth consecutive losing session. It fell to $1.3675 before finding a bid, perhaps with the help of the PMI figures. Initial resistance is seen around $1.3750. The $1.3800 area, which marked the lower end of this month's range, should be a formidable cap. We had projected that a break of $1.38 would target the $1.36 area.  


The Deputy Governor of the Bank of Canada announced that the central bank would begin unwinding its emergency liquidity measures. The short-term financing facility will end in May, while the commercial paper and the provincial and corporate bond programs will expire shortly and not be renewed. These moves raise the prospect that as early as the next meeting on April 21, the Bank of Canada may announce plans to taper its federal government bond-buying, now at C$4 bln a week. It had reduced the bond purchases from C$5 bln last October. It owns about 35% of the outstanding federal government bonds. Governor Macklem warns about a threshold at 50%. Making some conservative assumptions, the central bank could be approaching it by the end of the summer at the current pace. Meanwhile, the Deputy Governor estimated that end of the emergency measures would reduce the central bank's balance sheet by around C$100 bln (~17%) by the end of next month. The Canadian dollar initially rallied on the news, but the greenback's underlying strength proved too strong. Losing about 0.05% yesterday, the Canadian dollar was modest compared to the other major currencies but the yen, which rose by around 0.2%.  

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Read more by Marc on his site Marc to Market.

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