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The bar to additional ECB action in the period ahead is very high. The focus must be on implementing all the new measures (such as the corporate bond purchases and the new TLTRO). Then the impact of these programs needs to be monitored. Some think that after the summer, Draghi will push for more stimulus. We are less sanguine. That time frame strikes us as too aggressive. 

The strength of the US labor market, which will likely be confirmed with next week's national report, is unlikely to alter the outlook for the FOMC. That is not the main challenge presently. The early call is for a 200k increase in April nonfarm payrolls. This may not be sufficient to put the dollar bulls back in the driver's seat. Going forward consumption indicators may be more important than the employment data.

The imminent risk we have noted in Europe is the review of Portugal's credit rating by DBRS tomorrow. Recall; that ECB requires at least one of four top rating agencies give a country investment grade status for the sovereign bonds to qualify for purchases under QE. DBRS is the only one to give Portugal investment grade status. If this is changed, Portugal would join Greece and Cyprus where the sovereign bonds are excluded.

The EC is considering taking punitive action against Portugal (and Spain) for missing fiscal targets. Two months ago, DBRS was quoted on the news wires suggesting it was ok with the BBB rating and stable outlook assigned to Portugal. Over the past month, the 10-year benchmark yield in Portugal has risen 17 bp. The same as Italy and more than Spain ( +6 bp). This suggests that to the extent foreign investors own Portugal bonds, they are not too concerned about the rating review.

If this sketch is valid, it would suggest more of the same for the US dollar. The bulls may not move into ascendancy until there is a greater sense that the Fed will resume its normalization process. This is consistent with the longer-term technical indicators suggesting that the downside correction in the dollar may not be complete.


Marc Chandler
Global head of currency strategy at BBH
Marc to Market

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