Three Key Developments

The US dollar is generally offered today.  There does not seem to be a major catalyst.  Rather technical factors, and in particular, the euro's inability to fall through the $1.2880 area despite repeated tests appears to have encouraged the move to the upside, as the path of least resistance.

Month-end flows are difficult to anticipate but may also be playing a role today. Some 20% of mutual funds, according to Morning Star finish their fiscal year today. The closure of the markets for the last two days now leaves them with only today to make adjustments for tax purposes.  

At the same time, there is a bit of a risk-on flavor.  Global equities are mostly higher.  Spanish and Italian bond yields are lower.  Emerging market currencies are mostly bid.   The yen like the dollar is a bit heavier.  

However, short-run momentum indicators are stretched and some minor bearish divergences are emerging  NY traders, mostly returning from a weather-induced extra long weekend, have to decide whether it is going to be trend day or not.  Consolidation seems more likely than a significant follow-through buying the major foreign currencies today.

There are though three key developments to note.  

First, we drew your attention previously to the composition of Swiss reserves and recalled that it did not diversify as much as usual in Q2 out of the euro.  Today it reported Q3 figures and they indicate that diversification did indeed take place.  The euro's share of Swiss reserves fell to 48% from 60%.  The dollar's share rose to 28% from 22%, which accounts for about half of the move out of the euro.  Sterling's share more than doubled to 7% from 3%, while the yen's share edged up to 9% from 8%.  The Canadian dollar's share increased to 4% from 3%, while the "other"category, which includes the Australian dollar, Swedish krona, Danish krona, Singapore dollar and Korean won, was steady at 4%.  

In addition, the SNB indicated that bond holdings slipped to 83% of the reserve investments from 85%.  Equities--yes the SNB holds equities--rose to 12% from 10%.  Overall the valuation of reserves rose about 17.5% to CHF429 bln.  

Second, Norway's central bank met and as expected rates were held steady. The 0.7% rise in Sept retail sales was better than the 0.5% consensus forecast, but probably did not impact the decision.  More interestingly, the central bank indicated that it would refrain from selling the krone in Nov, after selling NOK500 mln in Oct. The market had generally expected the Norges Bank to sell NOK300-400 mln in November.  Recall that the regular selling of NOK is how the petroleum proceeds are recycled into sovereign wealth fund.  It is not immediately clear why, but the central bank indicated it fund the sovereign wealth fund in December.  The krone is the best performing G10 currency today as the North American session gets under way, with its 0.7% gain.  

Third, Spain's Rajoy continues to indicate that a formal request for aid is not imminent.  Indeed, what appears to be for the first time, Rajoy suggested that the banking union plans also deter the need for a formal request.  Spanish bond yields did not back up in response to this lack of urgency as they have often done in the recent past.  Instead news of modest improvement in the central government's budget  and the second consecutive monthly current account surplus in August were seen as more important.  

July was the first time since the advent of the euro that Spain reported a current account surplus and it was able to maintain a surplus in August.  This seems to be largely a function of growth differentials.  The contracting economy depresses demand for foreign as well as domestic goods.  Even more important for sentiment--leave aside the dated nature of the data--Spain experienced a net inflow of portfolio capital in August (2.34 bln euros), for the first time since Feb 2011.