The US dollar turned in a mixed performance last week. Firmer oil and commodity prices more generally helped lift the Australian and Canadian dollars, and many emerging market currencies. These currencies initially extended their gains ahead of the weekend in response to the Bank of Japan’s surprise 20 bp cut on some excess reserves ( to -10 bp).

The yen lost 2.25% on the week, its biggest weekly decline since the BOJ’s surprise expansion of its Qualitative and Quantitative Easing in October 2014. The Swiss franc was the second worst performer of the majors, losing 0.75% on the week. It fell to its lowest level against the euro since the SNB lifted its cap in mid-January 2015. There was some speculation, which cannot be verified yet, that the SNB had been weakening the franc in preparation of further easing by the ECB at its next meeting in March.

The divergence meme, which has been a key factor shaping our dollar outlook, is very much intact. We has suggested that the first phase was driven by what other central banks did. The Fed was on hold. The second phase began in December when the Fed hiked. Now the major central banks have moved in opposite directions. While we doubt that the Fed will hike rates four times this year, as dot plot suggested, we suggest the market may be underestimating the implications of full employment and the prospects of (gradually) rising core inflation (boosted by rents and medical services) by discounting only one hike this year.

The 100-day average has caught the euro’s highs since December ECB meeting. It was approached on January 28, and, after an initial lackluster response to the BOJ’s move, returned to lower end of its $1.08-$1.10 trading range that has confined the bulk of the activity over the past two months. That Depending on exactly how you draw it, there is a trend line off the Dec ECB meeting low (~$1.0525) and off the Jan 5 low that catches the Jan 21, 22, and 25 lows. The trendline now looks to be just above $1.08.