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In recent days, US sentiment has stabilized. Some were making the case that with the lack of progress on health care, the shift to tax cuts was good for investors. The US Congress continues to work on a compromise, without incidentally trying to get Democrat support. And healthcare savings (fro less coverage for fewer people) was supposed to help finance the tax reform, without requiring Democrat assistance. Several regional Fed Presidents continue to signal the potential for a quick rather than a slower pace of Fed hikes.

Oil prices also recovered smartly. The nearly 5% gain through early Friday is the most in a week since the week ending December 2, following OPEC's decision to cut output.  The higher oil prices and firm US data helped US 10-year Treasuries recover about eight basis points from the low point at the start of the week. The US 2-year yields rose nearly as much.

The Mexican peso is appreciated by almost 4.5% this month to lift the year-to-date gain to 11%. It is the strongest currency in the world in Q1. The Russian rouble is the second strongest, with a 9.3% gain. Among the majors, the Australian dollar has done best with a 6.2% gain. Ideas that the Trump Administration was softening its demands of NAFTA changes helped the peso extend gains. However, we think that many may have misunderstood the US position. Some clarification from Commerce Secretary Ross confirms our suspicion. The changes the US will demand to NAFTA still seem significant. The peso seems vulnerable. Technical indicators are stretched and suggest being particularly sensitive to a reversal pattern in the price action.

The US dollar is sporting a slightly softer profile. Firmness in Asia gave way to selling in early European turnover. The euro had been sold from $1.0910 at the start of the week to almost $1.0670 yesterday. It is consolidating now. The $1.0710-$1.0720, which we had identified as support may now serve as resistance. A break could spur near-term gains back toward $1.0760.

The preliminary estimate of March CPI in the eurozone rules out any shift in next months' ECB meeting. It is not only that the headline rate fell back to 1.5% from 2.0%, well below expectations, but the core rate fell from 0.9% to 0.7%. The core rate bottomed at 0.6%. The preliminary March reading means that the hawkish push by some at the ECB will be easily repulsed.

The dollar approached JPY110 at the start of the week and traded to JPY112.20 in Asia today before slipping back to JPY111.70. The high corresponds to a 38.2% retracement of the dollar's decline since the March 10 high near JPY115.50. The JPY112.80 area corresponds to a 50% retracement objective and the 20-day moving average.

Sterling fell a little more than two cents from the high recorded at the start of the week (~$1.2615). It seems vulnerable from a technical vantage point even though it posted its first quarterly advance since the referendum.

The dollar-bloc currencies are little changed on the day. While the Aussie was the strongest of the majors in Q1, the Canadian dollar was the weakest, gaining about 0.7% against the US dollar.

The US session features Feb personal income and consumption, the Chicago PMI, and the University of Michigan's consumer confidence and inflation expectations survey. Personal consumption will impact GDP forecasts, and there are upside risks to the 0.2% rise expected. Retail sales in Feb were disappointing, but there were sharp upward revisions to January. This will likely be picked up in today's broader measures of consumption.

The long-term inflation expectations in the University of Michigan survey are important. Inflation expectations pick up in surveys are often cited in FOMC statements The preliminary March reading was 2.2% (5-10 year expectation). This is a new low (since 1979). The 10-year breakeven is a market-based measure of inflation expectations. It is net-net steady at the end of the year, just below 2.0%.

Some observers and economists criticize the Fed for being too dovish. The Fed tells the market that it thinks it will raise interest rate five times by the end of next year. The market does not believe it. The market expects a more dovish Fed than the Fed does. The 10-year breakeven and the University of Michigan survey suggests one potential explanation why the market is giving little credence to the FOMC's projections.

Marc Chandler
Global head of currency strategy at BBH
Brown Brothers Harriman

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