Dollar Remains Firm as Liquidity Thins

The US dollar is firm and its post-FOMC gains have been extended against the euro and yen.  Yet, the lack of participation cautions against reading too much into the price action. 

While equity markets are mostly firmer, the 2.0% drop in the Shanghai, the ninth consecutive fall (the longest losing streak in nearly a decade), brings the cumulative loss to almost 7.5%.  The year-end squeeze in the money markets saw the key 7-day repo rate rise 100 bp to 7.6%.  This coupled with the resumption of IPOs next year appears to be the main drivers.  

S&P has been busy. Late yesterday, it lifted Mexico's rating to BBB+ from BBB, matching Moody's and Fitch's rating.  The peso, like many emerging market currencies today, is trading heavily, with the greenback resurfacing above MXN13.0.  S&P also reaffirmed the UK's AAA rating, with a negative outlook, and reaffirmed Ireland's BBB+, with a positive outlook.  It cut the EU's rating to AA+, citing a deterioration of creditworthiness of many members and the contentious EU budget talks.  There was little market reaction. 

The  euro has been pushed to $1.3625 before finding a decent bid in late morning activity in Europe.  Resistance is seen near $1.3700.    It finished last week near $1.3740.  We note that this week the US-German 10-year interest rate differential was essentially unchanged at 105 bp.  However, the 2-year spread has doubled to 15 bp from a little below 8 bp at the end of last week.  The widening of the spread has resulted both the increase in US 2-year yields and a decline in German 2-year yields in roughly equal measure. 

There are two judicial developments to note.  First, Portugal's court blocked a controversial part of the next year's budget that called for cutting government worker pensions by up to 10%.  This is not the first time the Portugal's court  forced the government to alter how the pain of austerity is distributed.  The market has barely responded.  

Second, a EU General Court dismissed a case against the ECB's OMT scheme and collateral changes.  Yet complete closure may be elusive, as its ruling was largely procedural not substantive:  OMT has not been activated and the plaintiffs lack standing as they have not been impacted.    Separately, the German Constitutional Court is expected to rule next year whether OMT violates domestic law.  

The data schedule has also been fairly light.  The UK's Q3 GDP was left unrevised at 0.8%, but the year-over-year rate was revised to 1.9% from 1.5%.  The Q3 current account deficit blew out to GBP20.7 bln from a revised GBP6.2 bln in Q2, but it may not be a bad as it appears.  Between Q2 and Q3 combined the market had been prepared for  a GBP37 bln shortfall, roughly evenly divided.  Instead the Q2 revision was for nearly GBP7 bln improvement, while Q3 was about GBP7 bln larger than anticipated.    Sterling may be under-performing the euro slightly on the day, but it has outperformed on the week by about 0.8%.  

The Swedish krona has continued to recover from its recent slide, despite this week's rate cut and intimation of another one next year.  The $4.5 bln contract for fighter jets for Saab and better than expected consumer confidence have helped spark some short-covering.   Last week, the euro was trading at more than 1-year highs near SEK9.10 and it is trading near SEK8.97 presently. 

After testing the $0.8800 on Wed and Thurs, the Aussie is enjoying a steadier  tone today.  Talk has focused on Telstra's sale of a large stake in a mobile business in Hong Kong for an estimated $2.4 bln and government's decision to allow Chinese companies to buy around A$7.5 bln of assets in the power industry. 

The North American session features potential revisions to US Q3 GDP, which will be recalled was flattered by a large increase in inventories and weak personal consumption.  Canada reports Nov CPI figures, which are expected to tick up a little but still at 1.0% on the headline and 1.3% on the core are not particularly problematic.   Canada also reports Oct retail sales.  The headline (expected ~0.2%) is likely boosted by auto sales.  For the second consecutive month, ex-autos, retail sales are expected to be flat.