Dollar and Yen Are Back In Vogue As Exuberance On Europe Wears Off


The US dollar and the yen are back in black today, as the markets are expressing doubts that the weekend EU/IMF plan will be successful in preventing eventual debt restructuring for Greece and the other peripherals.  While panic has been reduced, the negative euro sentiment remains in play.  The scandies were the worst performers in the G10 space, and are a mirror reflection of their standing as top performers Monday.  Euro bears must be emboldened by the fact that it has blown through major retracement levels on the downside and that the recent low of 1.25 is in sight.  Cable held up better than the euro as government coalition talks continues, so EUR/GBP also looks likely to retest its recent lows around .8430.  EM currencies are softer across the board, with EMEA underperforming and reversing Monday’s outperformance. PLN was the weakest performer, down 1.5% by mid-euro session.  China data was largely firmer than expected (see below), but we continue to believe that the current bout of market turmoil will keep PBOC on hold with regards to rates and the exchange rate.  No major US data today to give markets guidance, and so we expect the euro to continue losing ground this session as momentum traders simply go with the flow.

Global equity markets are giving back some of the post-weekend gains, with European bourses down substantially mid morning (see DAX down 1.1%, CAC 40 down 2%).  This comes after a weak Asia session, with the with the MSCI Asia Pacific index down 1.2%.  The Nikkei 225 was down 1.1% by the end of the session and low closes were also recorded on the Hang Seng (-1.4%), the Shanghai SE (-1.9%), and the Kospi index (-0.4%).  S&P futures point to a down open today.  Crude oil prices have given up some recent gains as well.

Flight to quality trades appear to be coming back on and this translated into falling yields in the core European bond market, with periphery mixed. Confirmed buying of EZ bonds by European central banks may be behind the bid tone there.  Germany’s 2-year bund yields are trading 5 bp lower higher (at 0.55%) while Greek yields were down 55 bp.  However, Spain and Ireland 2-year yields are up.  UST 10-year yields are down 7 bp, 2-years down 6 bp.   

Currency Markets                                                                                       

China briefly took centre stage overnight, with plenty of fresh economic news for the market to digest. In the event, it was all very good news on the data front. April retail sales surged by an impressive 18.5% y/y, a touch firmer than expected and up a fraction from an 18% yearly growth rate in March. April industrial production also points at a promising start to the second quarter for the Chinese economy, with a yearly growth rate reported at 17.8% y/y (a touch softer than expected) from 18.1% in March. Meanwhile, inflation is accelerating and this was in the limelight again with the release of the April CPI, with a yearly inflation rate picking up 2.8% y/y (from 2.4%) while April producer prices were reported at 6.8% from 5.9%.  The pick up in inflation will keep monetary tightening talks in place and while we do not expect an effective rate rise before later this year, further increases in the reserve requirements are likely sooner rather than later.  Note that this latest Greek crisis has confirmed that the PBOC’s strategy to wait (both on the rate hike and on the currency appreciation front) has been appropriate.

Following yesterday’s euphoria, markets have more time to digest the European stabilization program and a more critical approach may dominate. This means a more cautious market environment and a euro that has already loss momentum. As we stressed in a note yesterday, there are several question marks with the program (including the lack of details, the social implications of the latest austerity measures in the current context or again no real initiative to grasp intra euro zone competitiveness problems) , leaving plenty of ammunition to euro bears, still. Germany’s April final CPI was reported at 1% y/y this morning (unchanged on the month), confirming that inflation is a non-issue, a welcome timing considering that the ECB has now embarked on a QE program (even if not sterilized). In the UK, we are still waiting for an announcement on the new government, with yesterday’s Lib Dem/Tories talks reported to be going well and the market hoping for a coalition government to be formed within days. However, Gordon Brown has also announced that he will resign in order to help Labour and there is speculation that this may trigger fresh talks between the Labour and the Lib Dem. UK markets have traded more on international factors than domestic politics over the past two sessions but market participants may run out of patience if a government has not been formed within the next couple of days. Cable has eased back below the $1.50 level, with further support identified at $1.4733. On the economic release front, the March industrial production was stronger than expected, rising 2.0% m/m.  Mfg output jumped 2.3% m/m. The March BRC April retail sales monitor showed its strongest reading since December 2008 in April, with a like-for-like y/y rate reported at 2.3% (Easter timing helping). Meanwhile, there is continued evidence of a housing sector that is gaining momentum, with the RICS April house price index reporting its first gain in five months (at +17% from +10%).

This morning, the EC will issue its latest convergence program on euro entry for CEE candidates. The financial and economic crisis of the past couple of years has led to a notable deterioration in the CEE growth environment, with negative impact on public finances and questioning some of the more ambitious euro entry dates. Yet, the EZ developments of the past six months mean that the appeal to join monetary union is weakening by the day. Moreover, from a euro zone perspective, we would also argue that the Greek crisis will probably make euro entry more difficult in the future, with entry criteria likely to be very vigorously applied. Indeed, for some, Greece should not have joined the euro in the first place and this is a lesson to be learnt for the future. Expect the ECB/EC and euro head of states to show no flexibility whatsoever when it comes to interpreting the criteria for new members in the futureFrom a market perspective, euro entry delay talks should be expected to be a negative for CEE currencies in normal circumstances, but in the current context it is tempting to argue that being outside the euro zone is better at this point.

Upcoming Economic Releases                                                                       
America: US March wholesale inventories Asia: Japanese March leading, coincident index, South Korea April employment, Monetary Policy Meeting. Events: Fed’s Lacker, Lockhart, Plosser all due to speak, US 3 year auction.


This was the BBH CurrencyView by Marc Chandler. Marc 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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