Consoldiation May be Brief in FX

The US dollar consolidating this week’s losses against most of the major currencies; trading with a firmer bias within yesterday’s trading ranges. The general forces weighing on greenback remain intact. The negative news stream around Europe’s sovereign debt crisis moderating at the same time, though that short-term rates differentials have swung against the dollar and there has been heightened concern over a string of disappointing US economic data. The yen has under performed this week, slipping almost 1% against the dollar. This reflects the unwinding of cross positions, the stabilization of interest rate differentials, return of the risk appetite and, perhaps, some concern about the outcome of this weekend’s upper house election. The Australian dollar was the best performer, gaining almost 4% against the US dollar—encouraged by supportive indications from the RBA minutes and a strong jobs report that

Canada reported incredibly strong jobs growth (93.2k vs 20k expected) sending the Canadian dollar sharply higher and reinforcing expectations of another BOC hike late this month.

Global equities are enjoying one of their best weeks of the year if not longer. The MSCI Asia-Pacific Index rose 0.9%, capping off a 4% weekly advance. Particularly noteworthy, South Korea’s Kospi advanced 1.4% even though the central bank surprised by delivering a 25 bp rate hike. China’s Shanghai Index led the advance in the region with a 2.3% gain. Gains were broad based, with basic materials, consumer services and technology sectors leading the way.

European bourses are mostly higher, though they appear to be struggling to sustain the early momentum and the breadth of the gains seems to be narrowing. Most markets are up 5%-6.5% higher on the week, though Spain’s IBEX 35 is up a little more than 9% this week.

Major bond markets are a bit lower today, generally extending this week’s losses. Of note the US 10-year yield moved back above 3% yesterday. US, Japanese and German 10-year yields rose 6-8 bp this week. In Europe, the Spanish bonds were the hardest hit with 10-year yields up 23 bp on the week despite what was thought to be favorable reception to the bond syndication. Note that the US-German two-year spread has continued to widen in Germany’s favor. Over the past month there has been a 44 bp swing and the past week accounts for about a quarter of the move.