Dollar Sidelined, Yen in focus

The US dollar is little changed against most of the European currencies and within the dollar-bloc as a consolidative phase is emerging. The yen is center stage today following the resignation of Japan’s prime minister. The political uncertainty and calmer capital markets have seen the greenback extended its recovery against the yen to about 3% off the recent (May 20th low) near JPY89. Resistance in the JPY92.00-JPY92.30 area is being flirted with just prior to the start of the North American session.

Sterling is also a standout as its recent gains are extended. Unwinding Prudential/AIA related positions/hedges and flows out the euro zone are the key talking points. Since its recent low (May 20th) sterling has advanced about 3.8%. In consolidative/risk-on phases, we think attractive tactical opportunities exist in the dollar-bloc. We also like Sweden (though it is near the year’s highs against the euro), as the Riksbank is among the leading candidates for a rate hike in early H2.

The greater stability in the foreign exchange market does not mean global equities are higher. To the contrary, Asian and European equities are lower. The MSCI Asian-Pacific Index shed 1.1%, weighed down by industrials and commodity sectors. The Nikkei fell from the get-go and extending the losses following the political developments, but stabilized to close off 1.1%. In contrasts, The Shanghai market opened lower and recovered steadily to eke out a 0.1% rise. India’s market is among the best performers today, led primarily by the out performance of its telecom sector, amid talk of foreign interest in a local mobile phone operator. European bourse are nursing around a 1% decline near midday, paring back steeper initial losses. Health care appears to be faring the best. Oil and gas, utilities and financials are dragging up the rear.

Sovereign bond markets are generally quiet, but there are a few notes. First, Italian and Spanish bonds are under performing, with 10-year yields rising 6-7 bp compared with 1 bp increase in Portugal. Second, Thailand as expected left rates steady at 1.25%.

Third, Chinese money market rates continue to rise, with the 7-day repo rate rising to 3.28%, the highest since Oct 08, following the first increase in the one year bill rate in four months. The PBOC has been draining liquidity and the large bank convertible bond sale appears to be exacerbating conditions. The 12-month non-deliverable forward for the yuan continues to trend lower and is now near 0.7%.