Greenback Recovers

The US dollar has recovered from the decline seen in North America yesterday against the major European currencies. The take away from the price action is not however one of consolidation, but rather that good dollar buying emerged on the pullback.

The EMU situation is continuing to deteriorate. Good support was encountered yesterday just below $1.3300, but there is really little to hang one’s hat on until $1.3200. In the UK, while the risk of a hung parliament has long been discounted, but many of those momentum players and contrarians playing sterling from the long side have met a formidable obstacle at $1.55 and 0.8600 against the euro. Watch $1.5340, roughly the 20-day moving average, below which sterling has not finished the North American session below since 29 March. The yen is benefiting in this environment, but the dollar’s push back form the JPY94.35 high yesterday has still be fairly shallow thus far. However a break of JPY93.60 would suggest a near-term high is in place. Dollar-bloc currencies and most emerging market currencies are also softer today.

US stocks, which have advanced a little more than 70% of the time on Monday’s since last July’s lows, faltered yesterday and Asian and European bourses are lower today. The MSCI Asia Pacific Index slipped 0.2%, the Nikkei actually posting a 0.4%. It was led by a big rise in industrials and smaller gains in consumer goods and basic materials, which offset the drop in oil and gas, healthcare and financials. The Shanghai Composite fell 2% and posted its lowest close in late September 09. European bourses around 1%, with the southern markets among the hardest hit. Moody’s downgrade of some Greek covered bonds has given the Athens market another kick. The 2.7% decline is led by telecoms and financials. In the US, almost an eighth of the S&P 500 report earnings today.

There are two key and interrelated points about the global bond markets today. First, pressure is relentless in the peripheral European bond markets. Greek 10-year is a bit firmer, but Portugal is in line of fire and 10-year yields are up 22 bp today. Italy, Spain and Ireland’s 10-year bonds are falling. The pressure is much more severe in the 2-year space. Greek 2-year yields are up another 121 bp; the other peripheral 2-year yields are up 15-20 bp. The poor reception to the poor reception to the Itallian bill auction did not help matters.

Second, is that pressure is encouraging a safe haven bid for German bunds and US Treasuries, and this may still ensure a good reception at the sale of $44 bln of 2-year notes today, even though there is not much of a concession built in. Canadian bonds may also benefit from a safe haven bid.