BBH Special FX: Dollar Lifted by Woes in Rest of the World


The US dollar is narrowly mixed today.  The euro is heavier following news that Greece and Ireland’s budget deficits were even larger than expected by the EU’s calculations and this is seen as much more important that the flash PMI readings, which showed continued improvement.  News that Fitch warned that Japan’s creditworthiness was at risk from its rising debt initially weighed on the yen, the unwinding of cross positions lent the yen a modicum of support against the dollar.  An increase in mortgage approvals and a smaller monthly budget deficit helped offset the disappointing retail sales report to give sterling a little boost, but also appeared to be dragged lower by the euro.    

Equity markets are broadly lower.  The MSCI Asia-Pacific Index fell around 0.8%, led by a 1.27% drop in the Nikkei.  Health care, materials, and utilities were among the biggest drags, while the big news was Moody’s cutting Toyota’s rating to Aa2 from Aa1.  The Shanghai Index slid 1.1%, with banks and developers still under pressure.   European shares began firmer but quickly turned lower following the estimates of a larger deficit.  Some disappointing earnings also weighed on prices.  Most bourses are off nearly 1% near midday in London.  Financials, industrials, and oil sectors are the most significant drags.  The consumer goods sector is actually posting small gains.

Safe haven demand appears to be helping Treasury and German bunds.  Ten year Greek bonds yields are up another 30 bp today.  Spain’s 15-year bond auction was relatively weak with a 1.79 bid-cover.  Deficit news weighed on Irish bonds, with yields rising 10 bp today.  Portugal 10 year bond yields surpassed Ireland yesterday and yields are up another 4 bp today.  A couple of features in the emerging market space to note today.  Russia is raising $5.5 bln in its first international debt offering since 1998.  There is $2 bln of 5-year bonds and $3.5 bln of 10-year bonds.  Given that Russia’s oil/gas/mineral exports are largely invoiced in dollars and it is taking on a dollar liability, the bonds may be particularly interesting.  Egypt is reported about to sell $1 bln 10-year dollar bonds (~5.875% yield) and $500 mln of 30-year bonds (~7% yield) may also attract interest.  We note that the EMBI+ Index is a little above 240 bp down almost 80 bp over the past couple of months.

Currency Markets                                                       

Eurostat says that Greece’s deficit last year is at least 13.6% and not the 12.9% the government estimated on April 9th. It notes that the deficit may be 0.3-0.5% higher if the off-market swaps, classification of some public entities, and Social Security funds are taken into account.  Eurostat also noted that the Irish deficit was 14.3%, giving it the dubious honor of the largest deficit in the euro zone.  Meanwhile, civil servants in Greece have taken to the streets again, in their fourth strike of the year.  BBK President and a leading candidate to replace Trichet at the helm of the ECB noted earlier this week that the street protests show that parts of the Greek public fail to appreciate the situation.  This is a self serving explanation. It may sound cynical but Greece’s credibility was lost several months ago.  What has been lost more recently is Europe’s credibility.  From April 12th, when details of euro zone/IMF backstop facility were announced though yesterday, the 10-year Greek bond yield rose 139 bp.  Rather than the Greek public not appreciating the dire straits, it seems that it is the European elite that don’t get it.  A poll in Greece found 90% expect the IMF to demand more belt tightening and there are beginning to be signs that public opinion is turning against the Greek government.   As Keynes warned 90 years ago, about the “bleeding of Germany”, as justified as it may be, the “bleeding of Greece” cannot amount to much good.

Fitch warned that Japan’s credit rating is at risk due to its rising debt levels.   At the same time, the IMF indicated that Japan may need more stimulus.  The fact that the vast majority of Japanese government bonds are owned domestically, by the BOJ, life insurers, pension funds and banks offers little comfort.  Many observers see the low nominal yield in Japan (~1.3% on the 10-year bond) and might not appreciate that because of the deflationary conditions, Japanese real interest rates are above the US.  For the sake of this exercise, consider that US headline CPI in Feb was 2.3% and in Japan it was -1.1%.  When the US CPI is subtracted from the nominal 10-year yield of 3.74%, it suggests a real yield of about 1.4%.  When Japan’s 1.1% deflation is added to its nominal bond yield the real rate is closer to 2.4%.  Separately, Japan reported a somewhat smaller than expected merchandise trade surplus in March of JPY948.9 bln instead of JPY1.02 trillion.  Both imports and exports were weaker.  Exports were flat on the month and the year-over-year pace slipped to 43.5% from 45.3%.  Imports fell about 3.2% on the month and the year-over-year rate eased to 20.7% from 29.5%. The breakdown the importance of Asia as an export market is underscored by the 52.9% year-over-year increase.  Exports to China were up 47.7%.  Exports to the US slowed to 29.5% year-over-year form 50.4% in Feb.  The dollar found support just above the JPY92.70 area; below which stops are thought to be stacked.  Since Tuesday, the dollar has been capped around JPY93.40.

Germany warned yesterday that its economy may have stagnated in Q1, but the PMI data suggest the economy picked up as the quarter progressed and carried into Q2.  Germany’s flash manufacturing PMI rose to an all-time high of 61.3, while services edged fractionally higher.  This reinforces ideas that domestic demand remains weak but exports, as traditionally the case, are leading the economy.  In contrast France’s manufacturing PMI was little changed at 56.7 from 56.5, but the service PMI jumped to 57.8 from 53.8.  Overall the euro zone PMI for manufacturing rose to 57.5 from 56.6 and the service PMI rose to 55.3 from 54.1.   The debt/deficit and credibility issues are outweighing this positive economic news.    Turning to the UK, retail sales were a bit disappointing, rising 0.4% instead of the 0.6% the consensus expected.  The UK reported a smaller budget deficit than expected for March and revised lower Feb figures.   The CBI monthly trend survey was soft, but the forward looking expectations component increased.  The focus in the UK is on the televised debate tonight as numerous polls show a virtual dead heat, which still appears to give Labour a small plurality of seats.

Upcoming Economic Releases                                                                       
The US reports March PPI figures at 8:30 EST/12:30 GMT.  The headline rate is expected to rise around 0.5%, but the core measure a more modest 0.1%.  On a year-over-year basis the core is up around 1%.  At the same time the US reports initial jobless claims.  This is for the week of the April nonfarm payrolls survey.  In recent weeks, the BLS had pointed to seasonal distortions, which if correct, might lead to a significant (~30k) drop in today’s report.  Existing home sales for March will be reported at 10:00 EST/14:00 GMT.  Most look for a little more than a 5% increase.   Watch for Canada’s monetary policy statement at 10:30 EDT/14:30 GMT. Lastly, President Obama’s speech in NY near noon on financial report will draw attention.


Marc Chandler is the Global Head of Currency Strategy at Brown Brother Harriman. For more of BBH’s currency views, visit the BBH FX website here.

This material has been prepared by Brown Brothers Harriman & Co. (“BBH”) and is intended for information purposes only.  This communication should not be relied upon as financial, investment, tax or legal advice.  This communication should not be construed as a recommendation to invest or not to invest in any country or to undertake any specific position or transaction in any currency.  This information may not be suitable for all investors depending on their financial sophistication and investment objectives.  The services of an appropriate professional should be sought in connection with such matters.  The information contained herein has been obtained from sources believed to be reliable, but is not necessarily complete in its accuracy and cannot be guaranteed. Sources used are available upon request. Any opinions expressed are subject to change without notice. Please contact your BBH representative for additional information. BBH’s partners and employees may own currencies in the subject of this communication and/or may make purchases or sales while this communication is in circulation.

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