Dollar Hit, Market Turns Even more Aggressive

Far from the "buy the rumor sell the fact" type of activity after the ECB I had thought likely, the market has turned even more aggressive.  Euribor futures strip is implying even more aggressive tightening than it was prior to the ECB meeting and Trichet's press conference.  The euro has been up to $1.4420.  The $1.4500-$1.4600 area is the last hurdle ahead of $1.50. 

Sterling also is being lifted by rate hike expectations as easrly as next month, with today's PPI figures.  Short sterling futures strip is implying higher interest rates, but on the week the contracts imply slightly lower.  That said, it is interesting to note that sterling is the strongest of the G10 currencies this week, rising 1.56% compared with say the euro's 1.2% advance.  The antipodean curencies are just behind sterling for the weekly performance, followed by the Norwegian krone. 

Yen weakness persists.  There is much talk of new carry trades.  However,  volatility is too great.  Consider for exmaple that the "carry" between the yen and the Australian dollar is about 10 bp a week.  A small adverse currency move wipes out the carry.  That doesn't mean the selling of the yen and buying of other currencies is a poor idea, rather than it is more about momentum really than carry. 

Emerging market stocks are at 34 month highs.   The outflows seen from emerging market equity funds earleir this year is reversing and strong flows are being recorded in India, Indonesia, South Korea, Taiwan and Thailand.    Latam seems to be lagging as most remain lower on the year.