Dollar and Yen Bid on World's Woes

The US dollar is well bid against most of the major and emerging market currencies. Three issues dominate foreign exchange trading today: the now global investigation into one of the leading US banks, which appears to be part of a growing investigation that includes other banks as well; continued pressure on Greece, and to a lesser extent Portugal; and the latest polls threatening a hung parliament in next month’s UK elections. The same forces that are bolstering the dollar are also underpinning the yen, especially on cross-rate basis. With short-term technical indicators stretched, as the news is discounted, that it may be difficult to sustain the momentum in the North American session today.

Equity markets around the world are lower, following the S&P 500’s 1.6% slide before the weekend. New measures by China to crack down on its real estate market, where house prices rose almost 12% in March helped fuel the largest decline since last August as the 5.8% decline in the Shanghai Composite. The MSCI Asia-Pacific Index shed 2%, its largest decline since mid-February. Financials and commodities led the regional losses. Europe is faring only slightly better with the Dow Jones Stoxx 600 off 1.1% near midday in London. Financials and commodities are the hardest hit, but nearly all sectors are lower. There is increasing discussion of the economic costs of the disruption to European airlines and several names in the region have been hit hard (-3%-5%). Some estimate the costs to be greater than $250 mln a day.

Safe haven flows have pushed US Treasury yields to near 3-week lows, as the 10 year note yield slips toward 3.75% rather than the 4% level that it was flirting with earlier this month. Japanese government bonds extended its rally to the fifth consecutive session and the 10-year yield is now near 1.30%. European bond yields are mostly lower, but the peripheral bonds are under pressure. Greece bonds have sold off, with spreads and credit-default swaps at new highs. Pressure is also evident in Portugal, where 10-year bond yields are at new 2-month highs, up 7 bp on the day and up 20 bp over the past five sessions. Irish 10-year bond yields are 5 bp higher and 11 over the past 5 sessions. Little if any pressure is seen in Italy and Spain today. Separately, note that Fitch cut its outlook for Thailand’s local currency debt to negative from stable (affirmed A- rating) to reflect the heightened political uncertainty.