Dollar Up, Europe Choking

The US dollar remains firm against the euro as Greek woes continue to weigh on sentiment. The euro has practically returned to levels seen prior to last weekend’s financial aid package details. That area, $1.3480-$1.3500 remains key support. The $1.3560 area offers the initial cap now. The immediate reaction to the UK televised debates had the LibDem’s Clegg as the winner and this reinforced fears of a hung parliament and appears to have pressured sterling, but it bounced back smartly in the European morning. Offers in the $1.55480-$1.5500 area may provide the ceiling. Heightened perceptions of risk may underpinning the yen. Cross rate demand is also noted. The dollar has recorded new lows for the week against the yen today, but support near JPY92.50 remains intact. Emerging market currencies are mostly lower.

Disappointment with Google earnings in the US late yesterday, coupled with a pullback in commodity prices encouraged profit-taking in Asian equity markets. The MSCI Asia-Pacific Index fell 0.8%, with the Nikkei sliding 1.5% as exporter shares were sold-off. Hong Kong and China’s indices were over 1.0% lower amid fears of more tightening in China’s property market. We note that futures trading began today on China’s CSI 300. Over time this may become an important benchmark. Political pressures continue to undermine Thai stocks. The SETI fell 3.1% to bring the week’s decline to 8.8%. European bourses have recouped most of the initial declines and most are turning up by midday in Europe. Strength is being seen in the industrials and this is largely offsetting the weakness in technology, leaving most of the major bourses marginally changed.

The performance of peripheral euro zone bond markets is still the main focus. Greek bonds remain under pressure. The 10-year yield is up 12 bp today. It had been essentially unchanged on the week until today as the rally early in the week was reversed. The 2-year yield is up 19 bp and is still about 35 bp on the week. Although other peripheral spreads to Germany have widened this week, it is Portugal that has been the most susceptible to the contagion. Two-year Portuguese yields are up 8 bp today and 16 bp for the week. The 10-year yield is up 5 bp today and 8 bp for the week. US, German and Japanese 10-year yields are off 2 bp, while UK gilts are out-performing. The 10-year gilt yield is off 4 bp and back below the 4% threshold.