Dollar Firmer on European Fiscal Woes

Highlights
The US dollar is trading with a firm tone against nearly all the major currencies except the Australian dollar and the Canadian dollar as a rise in commodities and equities stoke risk appetite.  The euro continues to wobble over uncertainty about periphery’s fiscal woes (namely, Greece and Ireland), sliding down to $1.36 area despite the stronger-than-expected trade numbers, while sterling has given up half of Friday’s gains.  The yen is the weakest performer against the dollar, despite the stronger-than-expected GDP, as the change in the interest rate differential, coupled with the change in risk sentiment, continues to favors the greenback.  The greenback has risen to JPY83.00, its highest level since Oct 7.  And after a choppy trading session the Australian dollar is the best performer in the G10, nearly reaching parity and falling back into the $0.98-0.99 range. 

Global equity markets are mixed, but mostly higher, in Asia and Europe after stronger-than-expected data propels risk appetite.  In Asia MSCI Asia Pacific index is down by 0.3%.  After strong Japanese GDP figures the Nikkei is up 1% led by a 1.7% rise in technology and industrials.   Meanwhile, the Shanghai index is up 0.9% by a 5.6% gain in health care and a 2.9% rise in technology.   Yet European bourses are down with the Euro Stoxx 600 declining 0.1% led by a loss in financials and telecommunications.  And finally the FTSE and Dax are down 0.2% and 0.07% led by losses in health care and consumer services.

European sovereign bonds are a bit muted today after speculation continues about a potential bailout for Ireland.  Namely, Ireland’s 10-year yield is down 10bp on the back of the news, although Greece’s yields were up on the news that 2011 budget deficit was revised up to 15.4% of GDP from 13.6%.  On the day the Greek 10-year yield is up nearly 10bp.  Meanwhile, the yield on 10-year German bunds is up 4bp with 10-year gilt yields up 2bp.  The yield on the Japanese 10-year is up 5bp, at the same time, as the US 10-year yields are up 5bp ahead of retail sales.

Currency Markets

A great deal of uncertainty continues to hang over Ireland.  A number of European countries are pressuring Ireland to formally seek aid to stop the contagion, but Ireland, with cash on hand for several months does not want to be dictated to. The 80 bln euro package being thrown around is based on Irish refinancing needs through 2014.  However that also presupposes the cost of the bank bailout will not grow.  There is some talk that Ireland may seek to tap the EU’s 60 bln funds, separate from the EFSF (the ostensible 440 bln euro facility, which is really closer to 350 bln euros when everything is said and done) and is possibly seeking an avenue that would be available for Irish banks as opposed to the sovereign.  The premise that a solution in Ireland would relieve the systemic risk is questionable.  First, Portugal’s foreign minister made some remarks about the failure to adopt the government’s budget may force Portugal out of EMU.  Second, Eurostat now says that the Greece’s 2009 budget deficit was really 15.4% rather than 13.6% as previously.   The larger deficit means that more austerity will be needed.  Third, the statement issued by Germany, France, UK, Italy and Spain before the weekend, clarifying that the EU-approved systemic debt restructuring mechanism does not apply to current issues but only after 2013 helped support peripheral bond prices, but is exposed to the other horn of the dilemma–which is namely that there still is not resolution to the current debt dynamics, which investors are judging to be unsustainable. 

Today is the seventh consecutive session in which the euro has recorded a lower high.  It has been making lower lows as well, but that streak is under streak threat today if North American participants do not extend today’s losses through the $1.3575 area.  A break of $1.3550 could spur another cent decline in quick order, though a larger barrier is rumored to have been struck near $1.3500.    In addition to better news stream from the United States and the deteriorating situation in Europe, the increase in US yields is also lending the dollar support.  The greenback has risen to JPY83.00, its highest level since Oct 7.    The next key level is near JPY83.75, a break of which would allow for a return to JPY85.00.   Of the majors, sterling has been fairly resilient in the face of reduced risk of a new round of asset purchases and a less dovish quarterly inflation report.  However, sterling looks particularly vulnerable.  Key support is seen near $1.5950 and it that were to go, scope would exist toward $1.58.   Although most IMM net positioning were little changed, the near tripling of net long speculative sterling positions are an exception and are now the highest since March 2008.  These late sterling longs appear to be in weak hands and vulnerable to a reversal of spot. 

US October retail sales are expected to increase 0.7% from 0.6% in September while the ex-auto aggregate is also expected to rise to 0.3% from 0.4% in September.  October unit vehicle sales rose over 4%, which suggests a positive contribution from the auto component.  In fact, the auto industry accounts for nearly 25% of overall retail sales.  In addition gas station sales should also see a gain, given an estimated 5% gain in retail gasoline prices on the month.  Yet chain-store sales may be hurt by unusually warm weather, which may stymie demand for seasonal goods by as much as 1%, according to estimates by the ICSC.  The business inventory report later this morning is expected to increase to 0.8% in September from 0.6% in August.  Inventories should reveal a 0.3% August gain that follows prior increases of 1.0% (was 1.0%) in July and 0.5% in June. The inventory-to-sales (I/S) ratio in August should rise to 1.27 from 1.26 in both June and July, 1.25 in May, and a 1.23 record-low in both March and April, versus a 1.48 recession-high in January of 2009, and a prior 1.25 record-low in January of 2006.  With the US economic picture looking better a strong retail sales report could provide a positive reading for future GDP headlines.  The strong pickup in equity returns may buoy the wealth effect, leading to stronger consumer spending and a strong GDP clip.

Upcoming Economic Releases

At 08:00 EST / 12:00 GMT the US reports October’s advance retail sales report followed by the November Empire Manufacturing index.  The consesnsus if for a marginal decline to 14 from 15.73 is October.  Events: Treasury’s Wolin and Brainard are both scheduled to speak today.