Dollar Stronger As Euro Concerns Intensify

BBH CurrencyView

Euro continues to weaken as US markets reopen from holiday; consolidative price action Thursday is being replaced by a return to trend today, with dollar broadly stronger, EM and “risk” broadly lower. European equities are down, and futures market points to a down open for US equity markets.

GBP and dollar bloc are outperforming in the G10 space, with the euro and the Scandies underperforming. In the EM space, HUF, PLN, CZK, and ZAR are underperforming.

Break of 1.33 for EUR/USD sets up test of the October low around 1.3146, and we remain on track for our year-end target of 1.29. Markets remain spooked by lack of policy response from the euro zone. German officials continue to rule out any sort of euro bond or increase in EFSF, which are both seen as elements of the eventual solution.

Italy sold 183-day bills at a rate of 6.504%, the highest since August, 1997 and up from 3.535% at the last auction on October 26. Bid to cover was 1.47 vs. 1.57 last month. Italy 10-year yield now around 7.28%. Peripheral bond yields are all higher on the day.

Euro zone data remains weak. Italy September retail sales were weaker than expected, falling -1.6% y/y vs. +0.5% consensus and -0.3% in August. French consumer confidence slid to 79 in November from 82 in October, and was the lowest since 2009.

Japan Finance Minister Azumi was back on the tapes last night, complaining about the strong yen. He said Europe is “clouding” Japan’s markets, but also made some not-so-veiled intervention threats if he sees “speculative” activity. Dollar/yen remains above 77.

Singapore October IP was stronger than expected, rising 24.4% y/y vs. 8.1% consensus and a revised 11.3% in September. We view this as an unusually blip. With data continuing to soften in China, we think Asian trade and economic data will continue to soften in the coming months. However, we think SGD will stay true to form and outperform in the EM space ahead.

EUR/HUF sharply higher and likely to test October high around 318 after Moody’s downgrade late yesterday to junk Ba1 from Baa3 previously. Negative outlook was kept, and so further downgrades are possible as the fundamentals deteriorate. The Hungarian government called it a "financial attack." Central bank may embark on an interest rate defense of the forint if weakness continues, as it did back in 2008. However, we do not think it will have much impact in the current environment.