Dollar Comes Back Bid

The US dollar has come back bid today after yesterday's rather shallow correction.  Euro sellers re-emerged as the single currency approached its 20-day moving average for the first time in a couple of weeks.  Although the PMIs are a bit better, it does not change the underlying economic picture.  Nor does it impact the real concern about the sovereign and bank debt roll-over. 

In fact, a report citing unnamed people claims that Spain is considering applying of EU and IMF funds to finance the restructuring its banking sector.  The report has yet to be confirmed, but after the late last year admission that the 2011 deficit will be 8% if not above, compared to 6% target has already weighed on sentiment.  Spanish bonds and credit default swaps are the worst performing in Europe today. 

The euro's recent low was set on Dec 29 near $1.2858.  It bounced to a high yesterday of $1.3077.  It has already retraced 38.2% of those upticks (at $1.2993).  The 68.2% retracement comes in near $1.2940. 

Sterling is faring considerably better.  In the same period it bounced from $1.5262 to $1.5670 and is still with a $1.56 handle at pixel time.  UK construction PMI was better than expected at 53.2 from 52.3, but underlying economic weakness is still signaled by the weakness in mortgage lending and M4 growth.  Sterling appears to be the beneficiary of continued foreign demand for gilts, which appear to some as a safe haven from Europe and with more value than bunds.  It was reported earlier today that foreign investors bought GBP16.3 bln of gilts in November, the most since September 2008 and follows GBP12.5 bln purchases in October. 

The dollar's firmer tone against the major currencies and most emerging market currencies has failed to carry over to the yen, where the dollar is consolidating its recent losses.  In the second half of December the dollar was trading around JPY78.  It broke down in light activity during on December 29-30 and fell to JPY76.33 on Monday and has not been above JPY77 since. 

There had been some nervousness ahead of the German bund auction.  This was a re-opening of the issue that when first launched caused a stir as it was so poorly received.  However, today's reception was better, thanks to the mild concession built up and the redemption schedule.  More interesting was the ECB's dollar auction.  A bit more than $25 bln was taken for the 3-month tenor and $6.2 bln in the 7-day tender.  Although the cost of swapping from euros to dollars has fallen over the last couple of weeks, the dollar funding pressure remains evident elsewhere, including these auctions and in LIBOR which has continued to tick gradually higher. 

The Hungarian forint remains under pressure and has fallen to a new record low against the euro.   It is not just that its policies are unfriendly for investors, but it has its own 2012 refunding issues and the government policies mean IMF and EU assistance is unlikely to be forthcoming in the near-term.  As the currency is in uncharted waters, resistance and price targets are difficult to hang one's hat on.  That said, a convincing break of HUF320 could see a move toward possibly HUF340.