Word Up on Prices

The US dollar is finishing the week on a soft note after generally recouping some QE/OMT losses in recent days.  The highlight is sterling, itself, has been fairly resilient this week and has recorded a new high for the year today, briefly moving above the $1.63 level in early European activity.   The proximate trigger remains elusive and the UK did report a record large deficit for the month of August.  

Global equities are higher in a new wave of risk-on activity.  The Indian market, which has seen nearly $1.7 bln of foreign inflows this month alone (and almost $14 bln year-to-date) led the Asian markets.  The Shanghai Composite finished marginally higher today (less than 0.1%), but does not mitigate the fact that this week's 4.6% decline is the biggest of the year.  Given the weak official and unofficial data, many participants are disappointed with the lack of a more aggressive policy response.  Indeed, talk of a rate cut or a reduction in required reserves is even absent from the rumor mill, which itself is unusual for a Friday.

European bourses are mostly higher, led by telecom and financials, but the FTSE is lagging and is struggling to get into positive territory.   UK gilts are also under-performing, with the 10-year yield up 5 bp today.  Given the risk-on flavor today, it is somewhat surprising that the peripheral bonds are not doing better.  Spain's entire yield curve is fractionally lower, perhaps helped by reports suggesting that behind the scenes maneuvering is taking place that will allow the country to prepare a package of structural reforms that will large anticipate the conditions that may be imposed for access to unlimited ECB buying.   Italian bond yields are a few basis points higher on the day.   

Our general view remains that the dollar's decline over the last 2-3 months is nearly over and medium term investors should be looking for an opportunity to reduce short dollar hedges and/or reduce European exposure.   Sterling bottomed against the dollar (June 1), several weeks before the euro did (July 24).  We suspect that sterling, which often seems to lead the euro, will top first.   The new year high for sterling today has not been confirmed by other technical indicators; potentially signally a bearish divergence.  The situation should be monitored closely for a potential failure.  

The euro itself is trading within yesterday's range.  The bounce is coming off of yesterday's lows near $1.2920, an important technical area.  The bounce, at least initially, ran out of steam, after retracing about 50% of this week's modest decline (~$1.3045).  Also, recall that the euro finished the NY session Wednesday and Thursday below its 5-day moving average, for the first time since late August.  That moving average comes in near $1.3040 today.  It is possible that significant euro high is not yet in place, we suspect we are close in terms of price and time.  

The Australian dollar is also interesting.  With today's gains on top of yesterday's recovery, the Aussie has recouped about 61.8% of its decline from Sept 14 brief push above $1.06.  It also appears to be stalling.  A failure up here now would now also be more suggestive of topping action.