Correction within the Correction

The US dollar is broadly higher today.  The key question for market participants is whether this is the beginning of the resumption of the greenback's bull move or is it a simply part of the market churn.   Given market positioning and the fact that the Greek election is still a month away, we are viewing today's price action is as correction within the correction. As long as euro holds above $1.27  (equates to dollar resistance near CHF0.9450) this more benign view of the price action should be preferred.  

Last Friday and yesterday, the dollar weakened in the North American session.  Today has the makings for a three-peat.   The intraday technical show the dollar's bounce in Asia and Europe has left it over-extended and while additional modest gains are possible, the bulk have likely been scored.  

There are four developments to note, leaving aside the new  OECD forecasts.  

First, Fitch downgraded Japan to A+ and retained a negative outlook.  It cited the high and rising public sector debt ratios and noted the leisurely pace of fiscal consolidation.  Lack of more serious efforts could lead to further downgrades, it warns.   While the yen softened in response, there was little impact in the debt market, where the vast majority-- around 90%--of Japanese debt is owned domestically.  The dollar moved up to JPY79.85, but the it may have peaked or nearly so, ahead of the lower end of the band of resistance that begins near JPY80.  Initially, support is seen in JPY79.40-50 area.  

Second, UK inflation was a bit softer than expected with the CPI up 3.0% from a year ago in April compared with 3.5% in March.  This is the much anticipated base effects as the monthly gains was spot in line with the 0.6% consensus forecast after the 0.3% rise in March.  A range of different measures in addition to the headline, including the retail price index with and without mortgages and the core rate are at 2-3 year lows. 

This will be understood as increasing the likelihood of a resumption of gilt purchases as early as next month, though on the day, UK gilts, like German bunds and US Treasuries, are trading slightly heavier today.  Note that the IMF calls for more stimulus from the BOE (It has also called on the ECB to cut rates).  Sterling's retracement is a bit deeper than the euro's.  Initial support is seen near yesterday's low around $1.5730.  

Third, Germany holds a 2-year note auction tomorrow.  It set the coupon today of zero.   In the cash market the generic two year note is yielding 6 bp.  Five billion euros will be sought.  Some recent German auctions have not been covered and the zero coupon risks limited participation.  Nevertheless, the low yield reflects German safe haven status.  The US pays a premium of 23 bp and Japan, yes Japan pays 3-4 bp premium to Germany.  

Fourth, reports indicate that Greek banks will receive 18 bln euros for recapitalization purposes at the end of the week.  This is important because it shows there is not effort to cut Greece off from the European banking system.  It means the Greek banks be able to borrow from the ECB again.  That in turn means that the usage of the Emergency Lending Assistance (ELA) can ease, and hopefully with that the rather silly talk that ELA was either counterfeit or  the beginning of the new drachma.