Dollar Consolidates, Sterling Shines

The US dollar is consolidating its recent losses in largely uneventful activity. Sterling is the main exception to the generalization. Boosted by the firmer than expected CPI report yesterday and today’s favorable jobs report has pushed sterling to new 10-week highs against the dollar at $1.5280. The news stream and technical factors warn that the dollar’s down leg is not over. Pullbacks in the euro below $1.2700 have been shallow as it has chopped around in less than a half cent range thus far today. A move above $1.2750 may be seen as a break out and induce new buying for a move to $1.30-$1.31. For the second time this week, the dollar found the air thin above JPY89, despite continued risk-on type of activity in general.

Asian equities responded positive to Intel’s strong report. The MSCI Asia-Pacific Index rose 1.3%, led by a 2% rally in technology. Strong Singapore GDP figures (26% annualized in Q2) boosted the Straits Times by 0.8%, but Singapore is seen as a bellwether and this helped general sentiment. Thailand’s 25 bp rate hike may be behind the relative under performance of the Thai market. Its 0.4% gain was among the smallest in the region, excluding India’s outright decline. European bourses are struggling to extend their seven-day advancing streak. While technology and health care are generally firmer, oil and gas, financials and utilities are more than offsetting.

US shares are trading higher and the earnings focus is on financials. Japanese government bonds and benchmark 10-year bonds in Europe are under modest pressure today. Yields are up 1-2 bp and there is some widening of Italy, Spain and Portugal premium over Germany. Germany, Italy and Portugal are bringing new supply to market today. The German 5-year auction went well (bid-cover 1.8 vs 1.1 last time with a13 bp increase in yield). The Italian auction results were a bit softer, but still passable. The Portuguese sale was arguably the weakest with the largest rise in yields, but given the two notch downgrade yesterday it is a success. US Treasuries are generally firm. Today is the final leg of this week’s Treasury sales; $13 bln 30-year bonds.