The US dollar is little changed ahead of what will likely be a thin North American session due to the US holiday on Monday. The Australian and New Zealand dollars are attracting flows, ostensibly as a place to park funds, even though tomorrow's Australian election looks a dead heat.
Falling yields seem to be offsetting the rise in equities as a driver for the yen, which is the strongest currency today, gaining 0.6% against the dollar. The greenback was turned lower after making a marginal new high for the week in Asia near JPY103.40. A break and close below yesterday's low (~JPY102.35) would be bearish technical development.
Most bond yields are lower, with the US 10-year yield off four bp to 1.41% a new low. European bond yields are mostly lower as well. Talk that the ECB is considering moving away from the capital key determinant of its sovereign bond purchases to a debt-weighted is helping depress yields. The idea is that given the further decline in Germany yields post-Brexit, many Germany bunds no longer qualify.
The ECB's rules prohibit buying bonds with yields less than the deposit rate. This now excludes Germany bunds out seven years. Also, the fact that the premium over Germany widened may also be of concern to the ECB. However, to buy based on the size of the debt market would mean the ECB would accumulate bonds of the largest debtor (Italy) and the surplus countries are likely to balk on grounds that it will lead to a deterioration of the quality of the ECB's balance sheet. It will become a bad bank.
Separately the EU agreed yesterday to the Italian government providing as much as 150 bln euro liquidity guarantee for Italian banks if needed. This might make it easier for Italian banks to sell bonds, but to boost core capital, this is unlikely to prove sufficient. Moreover, there needs to be stronger incentive to restructure the industry. There is also some talk of increasing the size of the Atlas Fund, the privately financed backstop. We still think there is scope to increase the role of Italy's development bank CDP....MORE