The US dollar is again at the fulcrum of the foreign exchange market. The dollar-bloc currencies are under pressure, along with the Japanese yen, while the European complex is posting modest gains.  

The euro is consolidating in the half cent below $1.09. Yesterday’s marked up in early Asia saw the euro complete the 61.8% retracement of the losses since the US election, which was found near $1.0935. Recall that the euro was trading around $1.1075 early last November. The $1.0980 area corresponds with a 50% retracement of the euro’s decline from last year’s high (in May near $1.1615). The 100-week moving average is a little below $1.10.  

The French premium over Germany is narrowing a little more today. The 10-year spread narrowed by 18 bp yesterday to 50 bp and today it is near 48 bp, a little above the year’s low of 45 bp. A year ago it was around 33 bp. The polls show Macron winning the second round, but many recognize that the key to policies going forward is the outcome of the parliamentary elections in June. So while the odds of what some journalists have dubbed Frexit have fallen, there can be no visibility of French policy going forward.  

Given the recent CFTC positioning data, which according to Bloomberg showed that a week ago, speculators had a record large long euro futures position, had expected some pullback ahead of the ECB meeting on Thursday. It is unreasonable to expect a change in rates, but Draghi seems set to push against efforts by some creditor nations to push for an early rate hike. At the end of last week, he was clear that rates would stay at current levels of lower (thus maintaining an easier bias) and that risks to growth were on the downside.  

On the other hand, our technical work warned of the vulnerability of the Canadian dollar. The US Commerce Department has slapped 20% tariffs on imports of Canadian softwood lumber (used to build homes) retroactively. The issue has been simmering since 2015 when the previous agreement expired. The issue is that some producers get access to cheap lumber from government lands.   The tariff, which was used to compensate expired in 2015. Last year, Canadian producers were able to export lumber to the US duty-free and exports rose by nearly a quarter.