The euro and Swiss franc rose to new highs since Q4 2011, while sterling moved to within half a cent of the best level since 2009 set in mid-February in recent days. The market was all rife with speculation of a break out. However, our reading of the technical and fundamental condition, suggests dollar bears tread carefully.
If the past week was about the lack of escalation in both Russia/Ukraine and China, coupled with the ECB holding pat, next week may see the pendulum swing back a bit. This could lend itself to a more consolidative trading, which in the current context, may be somewhat supportive of the greenback.
With a referendum planned in Crimea next weekend that will likely lead Russia’s annexation, the confrontation may escalate again. Although the yuan strengthened in the past week, we suspect that uncertainty spurred by the first on-shore default and the apparent official desire to inject more volatility may weigh on the yuan.. China unexpectedly reported a large trade deficit in February, and although it was the distorted by the lunar new year, some will see evidence that the yuan is now over-valued. The ECB did not change policy, but the large pay down of LTRO borrowings, and the strength of the euro, may spur speculation that the door to easing has not closed. Moreover, official efforts to jawbone the euro lower may also increase.