Risk Appetite Rallies; Intervention Allows Yen Consolidation

BBH CurrencyView

• US dollar weaker as risk appetite rallies worldwide: yen and swiss the exceptions
• Coordinated G7 intervention Friday allows yen to consolidate
• Euro remains strong on hawkish comments and this week’s upcoming summit

The dollar is mostly weaker except against the yen and swiss, as risk appetite increases during the Asian session and the European morning.  Encouraging developments in the Japanese nuclear situation helped USD/JPY consolidate above the 81 level and AUD/USD above the 1.00 level. Also of note, the dollar is 0.5% stronger against the Swiss franc on lessened demand for a safe haven today. Asian equity indices closed higher, European markets are up by as much as 2% and US future are pointing to a 1.3% higher open. Japanese markets are closed due to a holiday but Nikkei futures are up 0.5%.  The Chinese yuan fixed stronger, now just 23 pips shy of its low of 6.5631 on March 7. This follows Friday’s 50bps hike in reserve requirements by the PBoC ahead of a large maturity of bills and sterilization bonds this month. US Treasury yields are 4 to 6 bps higher across the curve, while yield in Europe are up between 2 and 3 bps.  Crude prices continued to climb high through the London morning with Brent and WTI future both up nearly 2% as Western aircraft conduct military operations against Gaddafi’s forces. Oil prices have not fully reversed Friday’s declines.   Base metal prices rise as well.

The yen has been weakening against the dollar and all major crosses today.  There have not been any signs of central bank intervention today, following Friday’s action.  So far the joint intervention has been able to stabilize the yen.  Central bank intervention on Friday was able to get USD/JPY as high as the 82 level, and it was able to hold above 80.50 all day. We expect that range to set today’s range as well.  Markets tend to test intervention levels and central bank commitment, and thus we expect a test of at least the 80.50 level this week.  The news on the nuclear front appears positive with power lines to all reactors in place and cooling systems restarted at two reactors.  Some say the worst is over, based on comments by TEPCO as well as Japanese and US government officials, although no one yet is sounding the all clear. 

The euro has been strong for three days on the back of continuing hawkish ECB talk on rate hikes and a pause in periphery concerns before the summit March 24-25.  As part of the final agreement to be announced, the summit is expected to detail specifics on how the EFSF will be able to lend the full 440 billion euros and maintain AAA status.  The euro reached just shy of 1.42 overnight, not far from the November high of 1.4285.  The downside may come into play as some may hesitate remaining long euro before the summit.  We would expect support for the euro to come into play around 1.4050.  In regional elections over the weekend, Sarkozy’s party performed poorly, a bad sign for his reelection bid, and Merkel’s CDU party looks to have won the election, helpful for the CDU in next week’s elections in Baden-Wurttemberg.  10 year government bond rates in Greece, Portugal and Spain are marginally higher today, but down over the past week between 8 and 23 bp.  Ireland, which should come out with the least benefit from the summit, has 10 year yields up on the day and 5 bp on the week.  In the UK, it is a busy data week, with inflation, government finances, retail sales and BOE minutes coming out.  Sterling is at a 2 week high versus the dollar, at 1.6250, but remains weak against the euro at .8715, as the lessened expectation on interest rate hikes in UK compared with ECB hawkishness, weighs on the currency.  EURGBP may continue its upward trend, but we expect November peak just above .8800 to hold for the week.