Dollar Recovery Continues

The US dollar is bid. The initial attempt to drive it lower in Asia ran into a wall of buying. Follow through sellling was seen in Europe. Not only as the pressure on the peripheral debt markets, but Germany reported surpising weak industrial output. Industrial production fell 0.8% in Sept while the consensus forecast was for a 0.4%-0.5% rise. On the other hand, exports in Sept, were supposed to be up 1.5% were up 3%. This is the first rise in a couple of months. Little wonder that Germany has been critical of the QEII and efforts to limit current account positions.

The US election results are known and the likelihood of the extension of the 2001 and 2003 tax cuts is more likely. The details of QEII are known. The US reported a string of tier one economic data last week that was consistently better than expected, including upward revisions to back month private sector payrolls growth, producing through October a string of 4 consecutive monthly gains over more than 100k.

While not spectacular by any means, as the unemployment rate remains stubbornly high even though the labor force participation rate fell 0.2% to a new cyclical low and the lowest in a quarter of a century (64.5%), the job growth in this recovery is a bit faster than the past two jobless recoveries.

At the same time, the lifting of uncertainty in the US is allowing the developments in Europe to have a greater sway than they have in recent weeks. The interest rates spreads and credit default swap prices had been rising, but the market’s focus was on the US.

Greece and Ireland are at the center of the new storm. Greece has its own IMF/EU package, separate from the EFSF. The recent developments in the EU point to increased risks of restructuring after 2013. The success of the government in the weekend elections has seen some easing of pressure, but the 10-year yield is simply back into last Thursday’s range. (~11.22%).

Ireland also remains under pressure even though it does not need to return to the capital markets for several months. The government’s announcement last week was not persuasive to investors. The 6 bln euro in savings it seeks next year is twice the adjustment that it projected last year. At the same time it cut its GDP forecast to 1.75% from 3.3% a year ago. Many estimates suggest the cost of borrowing from the EFSF could be in excess of 8%. This area seems to be key for the Irish 10-year yield, now near 7.75%. The ECB is believed to have stepped up its purchases of Irish bonds in recent days. The government’ has a 3-seat working majority in parliament that depends on a couple of independents and a few crossovers. A key by-election will be held on Nov 25.