Turn-Around Tuesday Unfolding in FX

The US dollar has surrendered yesterday’s gains most of the major foreign currencies, after the upside momentum stalled in North America yesterday. The recovery US equities yesterday helped arrest the heightened anxiety seen before the weekend and early Monday. Constructive data from Japan in the form of a smaller than expected decline in the tertiary index (-0.2% vs expectations -1.0%) , a higher than expected UK CPI (3.4% year-over-year vs 3.1% expected) and a stronger German ZEW survey (53 vs 45.1 expected), helped lift the complex of European currencies. Last Friday’s highs are seen as important swing levels now. They are found around $1.3585 and $1.5507 for the euro and sterling respectively. Although the yen is moving in the opposite fashion as positions scrambled out of yesterday are re-established. Last Friday’s dollar high here is important as well. It comes in near JPY93.20, which corresponds to a retracement objective and the 20-day moving average. Hawkish minutes from the recent RBA meeting have propelled the Australian dollar higher. It is more than a 1.5 cents above yesterday’s lows. Last Friday’s high near $0.9355 is the next objective.

Global equity markets have generally moved higher in the wake of the performance in the US yesterday. The MSCI Asia-Pacific Index rose 0.5%, with Hong Kong and South Korean markets breaking a two-day drop. Strong bank profits helped lift Thai stocks, though basic materials and commodities led the local benchmark. The 5% rise and recovers a little less than half of the political unrest-inspired 13% drop since 7 April. We note that Indian equities managed to eke out a modest rise (~0.5%) rise despite the 25 bp rate hike in key rates and reserve requirements. Chinese shares continue to under-perform, with telecom, oil and financials the main drags. European bourses are around 0.5% higher near midday in London, with consumer goods, technology and industrials among the leaders. Telecoms are softer.

The recovery in equities and the firm economic data has taken a toll on the bond markets. European bonds yields are mostly 2-3 bp higher, with 10-year gilt yields rising 4 bp. Greek bond 10-year yields are up 18 bp and approaching 8%. This despite a favorable reception to the much-watched 13-week Greek T-bill auction. The 4.6 bid-cover was possible because the average yield was 3.65%--roughly double what it was in Jan. Other European bill/bond auctions in Ireland and Spain went smoothly. Sweden’s Riksbank left policy on hold, but continued to offer guidance that suggests a hike in H2. The Bank of Canada meets today. The issue here is not whether they hike or not, as not one expects a hike, but rather the kind of guidance it gives. The market seems split between a June and July hike, though for medium term investors, it’s a bit of splitting hairs. The BOC will be the first in the G7 to hike rates.