Highlights for Groundhog's Day

The US dollar remains under pressure in the foreign exchange market, driven by its resumption as a financing currency as growth and inflation raise prospects of BOE and ECB rate hikes while the Federal Reserve is still committed easing monetary conditions.

At the same time, investors growing more confident that officials will address the peripheral debt situation and barring a significant rise in oil prices, the turmoil in the Middle East is seen largely as a political event. Sterling takes the lead today following the much stronger than expected construction sector PMI (53.7 vs 49.1 in Dec) and shoots above $1.62. The early Nov high was set near $1.63 and this is the immediate target. The euro is extending its recent gains and the $1.40 level beckons.

Elsewhere of note, the Swedish krona is being hit by a wave of profit-taking after its recent run. Yesterday it recorded multi-year lows against both the euro and dollar. Underlying fundamentals remains strong. Global equity markets extend their run, encouraged by ideas that the recovery in the major economies is strengthening and the highest close in the Dow Jones Industrials since June 2008 and a three-year low in the VIX.

Many Asian markets are closed for the Lunar New Year celebration, but the markets that were open posted healthy gains with the MSCI Asia-Pacific Index rising 1.3%, its largest gain in a couple of months. European shares are also mostly higher, with the FTSE leading the way among the major markets. As in the currency, profit-taking is evident in Sweden, where the key Stockholm measure is off by around 1%. Consumer goods, industrials and health care are the sectors where the profit-taking has been the strongest, while telecoms are bucking the trend.

There are two key developments in the debt markets today. First, peripheral bonds are rallying strongly. Ten-year yields are off 8-10 bp in Portugal and Italy, 17-18 bp in Spain and Ireland and almost 30 bp lower in Greece. The market has taken in stride S&P’s downgrade of Ireland’s rating and maintenance of a negative outlook. Credit default swaps are also falling sharply. This is being driven by ideas that a “comprehensive” plan is in the works and will be discussed this weekend.

Second, the UK data has increased the market’s confidence that the BOE will hike rates and this has UK interest rates broadly higher, with the short-sterling futures strip yields rising 6-9 bp and the 2-year gilt yield rising 7 bp. Separately, Iceland cut their key rate by 25 bp to 4.25%.