Dollar Remains Soft

The US dollar continues to trade heavily against the euro and yen, but it is consolidating against the other major currencies. Poor US economic data and more benign news streams from Europe continues to fuel the euro’s recovery. It is moving above its 100-day moving average for the first time since mid-Dec 09 (~$1.2917).

Ideas that China’s growth is also moderating is a key factor behind the dollar-bloc’s under performance and fueling the unwinding of cross positions against the yen. Soft Q1 CPI (0.3% q/q) in New Zealand has seen the Kiwi drop 2%. Outside the dollar-bloc, the pullbacks in the major currencies remain shallow. This suggests that the momentum traders have experienced little pain and that recent moves have more room to run.

Global equities are mostly directionless, finding little leadership from the narrowly mixed close of the US markets yesterday. The MSCI Asia-Pacific Index was off about 0.8%. The Nikkei slumped almost 2.9%, the biggest decline in six weeks. It is easily the poorest G7 bourse this week, the only one to have declined (-1.85%). The strength of the yen is taking a toll on Japanese companies with high international sales. European bourses are posting minor gains, with the FTSE leading the way, helped by BP and news that the oil leak may be capped.

Most bond markets are fairly quiet. Japanese government bonds softened a little today with the 10-year yield rising a single basis point, but the 7 bp drop this week is the largest of the year. European bonds are narrowly mixed, but Spanish bonds are the notable exception and have continued to rally strongly. The 10 bp drop in the 10-year yield makes them the best performer in Europe this week. Irish and Portuguese bonds are under performing with 10-year yields up 29 and 14 bp respectively this week. Meanwhile the US 2-year yield is at record lows, and the 10-year is back below 3% and the 30-year below 4%.