Dollar Pares Losses Ahead of the Weekend

The US dollar is firmer across the board, but within a consolidative phase after sharp losses over the past couple of sessions amid greater uncertainty over the timing of the Fed's exit strategy from its exceptionally easy monetary policy.  It is not clear that the adjustment is over.  Bernanke's semi-annual testimony to Congress next week is anxiously awaited, especially given the volatility his comments have injected in recent weeks.  

Bernanke's comments, within the context of market positioning and expectations, drove the price action this week.  The dollar fell.  It helped extend the US stock market gains, which enter today up six consecutive sessions and is poised to post its biggest weekly gain of the year.   Bernanke's comments helped ease the US yields, with yield on the 10-year note slipping to new lows for the week now, which are about 15 bp below the level since at before Bernanke.  The implied yield on the Dec 2014 Eurodollar futures has also fallen about 15 bp this week.

Asian equities were mixed, with the MSCI Asia Pacific Index finishing essentially flat.  It has gained about 4.5% since the week's low was set on Monday and all the equity markets in the region advanced, except Thailand, which was flat.  European equities are higher, with the Dow Jones Stoxx 600 up about 0.3% near midday in London.  It is up about 3.5% for the week.

The rally in US Treasuries continues to help lift global bond markets.   Of note, the 10-year JGB yield at about 0.82 bp is at the lower end of the range that has been established since mid-May.  The take-away development from this week's BOJ meeting is that it is unlikely to take fresh action.

Separately, new political worries in Portugal, after the President seemed to call for a grand coalition government instead of the agreement to strengthen the current two-party coalition, and this appears to have renewed the under-performance Portuguese bonds and stocks.  Note that the 8th Troika review that was to begin next week has been postponed, at the request of Portugal, due to the political strains, and now will reportedly take place in tandem with the 9th review at the end of August/early September. 

S&P upgraded its outlook for Ireland's rating to positive from stable.  This could set the stage for an upgrade its BBB+ rating , though probably not until next year.  Irish debt market responded favorably and the 2-year yield is off about 16 bp.  

China reported somewhat slower money supply growth though faster loan growth.   M2 expanded by 14% on a year-over-year basis, slowing from 15.8% in May.  The Bloomberg consensus called for a 15.2% pace.  New yuan loans rose by CNY860.5 bln, up from 667.4 bln (CNY800 bln consensus).  

However, aggregate financing, which picks up shadow banking activity as well, slowed to CNY1.04 trillion from CNY1.185 trillion in May.  The consensus had forecast an increase.  This is important as it suggest the government is seeing results from its efforts to rein in shadow banking.  Consider that the gap between yuan loans and aggregate financing is a measure of the shadow activity.  In June 2012, for example, yuan loans were CNY919 bln and aggregate financing was CNY1.78 trillion, a gap of CNY861 bln.  Shadow banking was providing 3/4 as much credit as the banks..  The data reported today shows that the gap last month was CNY244 bln.  Shadow banking provided about 35% as much credit as the banks. 

Today's North American session features the June US PPI.  The headline may be inflated by higher energy, but the core rate should be largely steady.   Yesterday's report of softer than expected import prices may suggest a small downside risk.  The Univ of Michigan also reports a preliminary consumer confidence measure for July.  There are also three Fed presidents that speak today, Williams, Plosser and Bullard.  Mexico reports May industrial output figures and a recovery from the 1.7% decline in April is expected.  The central bank is expected announce it has kept the overnight rate target steady at 4%.  Lastly, we note that Tokyo markets are closed for holiday on Monday and China is expected to report Q2 GDP and a number of other economic reports over the weekend.