Dollar Softens Modestly In Thin Holiday Trading


The US dollar was mostly softer vs. the majors, but remained in narrow trading ranges as both UK and US markets were closed for holidays.  While the euro saw a brief respite, we believe that the negative news stream will continue and so the euro bear trend should remain intact.  Yen was softer too and underperfomed the buck and so dollar/yen rose to its highest since May 20 and stayed above 91.  EM FX was mixed.  Biggest gainers on the day vs. USD were CZK, CAD, MYR, GBP, and SEK, while biggest losers vs. USD were ILS, RUB, KRW, ZAR, and TRY.  CAD boosted by strong GDP, while ILS suffered from increased Middle Eastern tensions (see below).  
US equity markets were closed for holiday.  European markets were down, with Euro Stoxx 50 falling 0.15%.  Nikkei futures point to a down open for Japan but the softer yen should help Japan exporters. 

US bond market was closed.  European bond markets were mostly higher, as 10-year yields in France and Germany were both down 2 bp, respectively.  Greek 10-year yields rose 4 bp, Portugal fell 2 bp, Ireland fell 3 bp, Italy rose 1 bp, and Spain rose 4 bp. 

Currency Markets
German President Horst Koehler abruptly resigned, adding to the general feeling that German politics are in flux, which in turn may hinder any future attempts to address the ongoing crisis in Europe.    
ECB board members Weber and Draghi both urged a quick end to ECB bond purchases.  Meanwhile, ECB signaled that it had reduced its government bond purchases further in the third week of the purchase program to EUR8.5 bln from EUR10 bln the second week and EUR16.5 bln the first week.  
Euro zone M3 was reported still contracting y/y in April, so we’re not sure what all the fuss is about with regards to ending and/or sterilizing those bond purchases.

Yen softened on heightened political uncertainty, as Japan’s Social Democratic Party left the governing coalition after Prime Minister Hatoyama dismissed the party’s only Cabinet minister for not endorsing his plan to relocate a US base within Okinawa. 

The departure weakens the government less than two months before parliamentary elections for half of the seats in the Upper House of parliament.  Polls show 63% of voters want Hatoyama to resign after he abandoned a campaign pledge to move a US military base off of Okinawa.
Hungary central bank left rates steady at 5.25%, and said future rate moves will depend on market risk appetite. 

Russia central bank cut rates 25 bp to 7.75% in order to boost lending.
Chile central bank minutes show a 25 bp hike was discussed before rates ultimately kept steady at 0.5% in May.

Canada GDP grew an annualized 6.1% in Q1, much stronger than expected.
Korean government responded to concerns about central bank independence, and said that the Vice Finance Minister who attends the bank meetings will now leave during the actual vote on interest rates. 

Poland GDP growth slowed to 3% y/y in Q1 from 3.3% y/y in Q4 09.
Middle East tensions ratcheted up after deaths resulted from an Israeli raid on an international flotilla that was reportedly carrying aid to Gaza.

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