Dollar Soft, Tests 200-Day Moving Average against the Yen

The US dollar is sporting a slightly softer tone to start the week. It remains with the pre-weekend trading ranges against the euro, Swiss franc and sterling. It has edged lower against the yen to a two-month low and testing its 200-day moving average (~JPY101.23) for the first time since November. It has not made a sustained break of this long-term moving average for more than a year and a half. A break would spur a test on the year's low, set in February near JPY100.75. The yen is the strongest of the major currencies today.

Profit-taking continues to be evident in Spain and Italy, but this does not appear to much of a drag on the euro today. Spain's equity market is off 1% while Italy is off 2.5%. The Dow Jones Stoxx 600 is off 0.75%. The same story is evident in the bond market. Benchmark 10-year yields are up 8 bp in Italy and 5 bp in Spain and Portugal. The yields in the core bond markets (US, UK and Germany) are edging lower.

We had placed emphasis on the capital inflows into the euro area periphery in explaining the euro's rise in recent quarters. Although they cannot move tick for tick, we suspect that the profit-taking that periphery will weigh on the euro. Some of those funds appear to be returning to the US, where investors had been important buyers of euro area assets.

Some of those funds are moving into the emerging markets. We note that despite the Asian and European regional stock indices are lower, the MSCI Emerging Market equities has bucked the trend and is up almost 0.3% today to new six month highs.

BOE Governor Carney warned over the weekend that the UK housing market was the biggest threat to the recovery. The focus on macro-prudential measures to address this is encouraging investors to push out the first rate hike. This is reflected the gains in the short-sterling futures strip. Inflation data will be reported tomorrow, and a small tick up is expected in the headline and core CPI and the PPI output prices.

Given that the UK economy is only now surpassing its pre-crisis size, other observers might focus more on aggregate demand rather than housing as a more formidable challenge for the UK economy than housing prices. And here, the disappointing weekly earnings growth, which are barely keeping pace with inflation, despite the continued decline in the unemployment queues and the decline in the unemployment rate, underscores the challenge.

The dubious honor of being the weakest of the major currencies goes to the Swedish krona today. It is off about 0.3% against the dollar and nearly 0.5% against the euro. The unexpected rise in unemployment was the main culprit. It rose from 8.6% to 8.7% in April. The consensus had expected a small decline. The same is true for the seasonally adjusted measure (8.2% vs.8.1% in March). The euro declined from the year's high set in April just below SEK9.14 to below SEK8.97 last week. That down move looks complete, and a push back above SEK9.05 would lend credence to the view. Many look for the Riksbank to cut rates in July. Governor Ingves speaks tomorrow.

There have been reports that Putin has (once again) orders troops near the Ukrainian border to return to their bases. Past reports have not been confirmed by NATO. However, there does seem to have been a change in tone by Putin, and there is some thought that the crisis may subside after next weekend's election. Petro Poroshenko, the Chocolate King, is widely expected to win the presidency. He is seen as a moderate with business interests in Russia.

The other source of geopolitical tension over the weekend was between Vietnam and China. Following violent demonstrations in Vietnam, China evacuated more than 3000 citizens and Taiwan prepared to do likewise. Foreign investors continued to buy Vietnamese stocks, which helped lift the stock market to two week highs.

Separately, China reported new home prices rose in April in the fewest cities in 1.5 years (44 of 70 cities down from 56 cities in March). The government has been trying to cool the housing market for for a few years. It is working, and now officials are relaxing their grip. Last week, the PBOC called on banks to expedite the granting of mortgages. It wants developers to cut prices to boost demand. Note that at its peak, the housing market is estimated to have accounted for nearly a quarter of China's GDP.

In any event, concerns about the housing market weighed on Chinese shares, which fell to 3-week lows and property developers were the weakest sector. The Shanghai Composite briefly dipped below the 2000 level, which is generally thought to be an important level for officials. The 7-day repo rate fell to two week lows today (~3.10%) and is off over 100 bp this month amid speculation the PBOC will provide ample liquidity amid housing and equity market strains. For its part, the dollar is testing the CNY6.24-CNY6.25 area, which is also about a two-week high.