Look for Dollar Dips As New Buying Opportunity

By Marc Chandler of Brown Brothers Harriman


The US dollar has seen its initial gains scored in Asia pared, but the risk is that North American players resume the buying of the greenback.  The euro initially fell to about $1.1876 in early Asia before recovering.   The $1.2000-$1.2050 area may be sufficient to cap the single currency.   There is some chatter that of some official interest that might have helped stabilize it, but it is difficult to verify.  Other major currencies have also seen initial losses pared.  In the yen’s case, the opposite:  early gains have been pared.  The dollar largely held JPY91 support.  The euro fell to almost JPY108 before find a big, but now approaching JPY110, may also seen fresh North American sales. 

Global equities are broadly lower, even if the sharp losses in the European bourses have been recouped a bit.    Concerns about the growth trajectory, in light of the disappointing private sector job gains in the US and the G20 shift toward endorsing greater fiscal consolidation, coupled with a general risk averseness continues to take its toll.  The MSCI Asia-Pacific Index was off 2.3%, with the Nikkei dropping 3.8%, its biggest loss in around 14 months.    European bourses are off around 1%.  Technology, telecom and utilities have been hit the hardest.  Financials and oil and gas are also lower, but faring the best. 

It is difficult to find the safe haven bid for bonds today, though the JGBs rallied, pushing the 10-year yield to near a 2-year low and 10-year bund yields touched a record low (~2.54%), but is unchanged on the day.  US 10-year Treasuries are slightly lower.  European spreads over Germany are continuing to widen.  This is not just a peripheral development as illustrated by the continued widening of the German-French spread (+5 bp on the day to 47 bp).  It has widened 20 bp over the past five sessions.  Pressure is also evident in Belgium (+6 bp on the day to 998 bp).  It has widened almost 50 bp over the past five sessions, though new supply today may be taking a bit of an extra toll.    Hungary returned to the spotlight due to the strength of the Swiss franc and to ill-timed comments before the weekend, It’s 10-yeat yield is up 19 bp today to 8.18%. 

Currency Markets                                                                                       

The G20 tried to paper over differences, but to little avail.   The shift in the statement from the need for fiscal support for the fragile recoveries to the need for fiscal consolidation did not survive through the press conferences, which saw US Treasury Secretary Geithner call on Europe and Japan to boost domestic demand and not to count on exports and the stretched US consumer.  .The US and European proposal of a global tax on banks was defeated, but the UK’s Osborne seemed to suggest that maybe the UK will unilaterally try to implement it.

The German Constitutional Court is back in the thick of things.  According to Der Spiegel, Germany’s high court may consider the guarantees under the EU/ECB/IMF Stability Mechanism.  Ironically, today the Eurogroup of euro zone finance ministers is expected to give its formal approval for the special purpose vehicle which stands at the heart of the Stability Mechanism.  It is not clear if the Constitutional Court would throw a wrench into the plans, but the risk is surely heightened.  Moreover, it plays on fears of the disintegration of EMU.  A piece in the UK Telegraph apparently says it could happen over the next five years, while the policy group CEBR says it could happen as early as this week.    While of course recognizing the pressure in the euro zone, we do not share that degree of pessimism.  That said, the German Constitutional Court injects a new unknown into the mix. 

The Bank of England meets this week and although the market consensus expects no change in policy, public opinion polls out of the weekend suggest people are losing confidence in officials’ ability to control prices.  This sentiment appeared to be reflected in the Shadow MPC, where four of its 9 members voted in favor a 5-0 bp rate hike this week.   Prime Minister Cameron has indicated that the government will make a pre-budget statement tomorrow on the spending review framework.  Cameron has been quoted in the press acknowledging that the fiscal problem inherited from Labour is even worse than the coalition government thought and that the potential consequences are more critical.   Cameron appears to be positioning for serious austerity measures and appears to hinting at a VAT increase and spending cuts concentrating in pay, benefits and pensions.  Sterling briefly dipped below $1.4300 in Asia and rebounded above $1.45 in Europe.  Initial resistance is pegged now in the $1.4550-80 area. 

German manufacturing orders for April jumped an impressive 2.8%.  The consensus had expected a 0.2% increase.  The March series was revised up to 5.1% from 5.0%.  Yet the details of the report illustrate the conflicting pressures at work.  Domestic orders rose 2.9%.  While this would seem to be a sign of strong domestic demand, recall that Germany exports about 40% of its GDP (roughly the same percentage as China).  That means the domestic manufacturing orders may be to help service foreign demand.  Foreign orders themselves were up 2.8%, but orders form within EMU fell 1% (non-EMU orders rose 5.5%).  On one hand, today’s orders data suggests that the risk is on the upside of tomorrow’s report on April industrial production (news wire consensus is for a 0.7% increase). 

Hungarian rhetoric which hit the markets before the weekend has calmed down considerably.  The new government is expected to unveil a new economic plan tomorrow and that it is committed to previously agreed upon budget deficit target of 3.8% of GDP this year.  Some news savings will have to be found.  The deficit widened to HUF736.2 bln at the end of May from HUF637 bln at the end of April.  Nearly 85% of this deficit target has been reached.  Watch the press conference from the Prime Minister’s spokesperson Szijjarto around 12:00 GMT as a potential risk event.  Comments from Moody’s and Fitch earlier today suggest that the government’s comments at the end of last week have no direct impact on Hungary’s credit ratings, there is concern about the fiscal outlook post-election.  Moody’s in particular drew attention to the negative implication of higher interest rates and weaker currency that resulted from the government’s comments. 

Upcoming Economic Releases                                                                       
The US reports April consumer credit late in the session (3 pm EST/19:00 GMT).  A small decline is expected.  Several Fed officials speak today, but are not seen as market moving events.

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