The Dollar Index Extends Gains Into The Sixth Consecutive Session

The euro has thus far been confined to 10 ticks on either side of $1.13 as it consolidates ahead of tomorrow's ECB meeting. The market expects a dovish bias after the risk assessment was cut in January. There is an option for 680 mln euros at $1.1275 and a little more than 960 mln euros at $1.1300, both of which expire today. On each of the next two sessions, there is a large (1.7-1.8 bln euro) option at $1.1250 that expires. On the tops side, tomorrow sees a 1.2 bln euro strike at $1.1360 roll off and on Friday the higher strike is at $1.1425 for 1.7 bln euros. Resistance today is seen in the $1.1320-$1.1360 area. 

Sterling is lower for the fifth consecutive session. The mood toward sterling has soured a bit, and some participants are eager to take profits. Sterling had rallied more than five cents since the middle of February. The softer and later Brexit scenario had been discounted. Something that increases the prospects of a second referendum or the possibility that the UK remains in the customs union could renew sterling's climb. Initial support is seen in the $1.3050-$1.3060, which houses the 20-day moving average, congestion in late-February, and the 50% retracement of the last leg up. 

America 

The Bank of Canada meets. There is little doubt that the overnight rate will be left alone at 1.75%. The issue today is the extent to which the central bank acknowledges the economic slowdown (0.4% annualized Q4 GDP). Many economists expect it to stick with its tightening bias; that it still intends to remove accommodation or normalize rates. Market participants appear to be leaning the other way. The Canadian dollar is just above the year's low and the implied yield on the BA futures have fallen around 25 bp since mid-January.  

The ADP estimate of US private sector jobs growth is closely watched. A rise of around 190k (January 213k) would seem to remove the risks of a downside surprise in the official data on Friday. Many market participants already seem to have discounted this, and it is one of the reasons the Dollar Index is up for the sixth consecutive session. The twin deficit challenge is back in the news and may take some of the employment's thunder. With the budget balance for January reported yesterday, we know now that the deficit for the first four months of the fiscal year is about $310 bln. The main cause of the widening appears to be the decline in revenue associated with the corporate tax cut. Today, December and therefore the 2018 trade deficit will be announced. Despite the incredible improvement in the energy trade balance, the overall trade deficit has swelled around 20% over the past two -years to about  $600 bln in 2018. The exchange rate is an easy target, but growth differentials, extenuated by US fiscal stimulus when the economy was already growing in excess of what the central bank thinks is its long-run non-inflationary rate, may offer a more robust explanation.  Remember the US exports around 15% of GDP.  

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Read more by Marc on his site Marc to Market.

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