Monday, November 14, 2016

Currencies: "Dollar Steps Up to Start Week"

Following on yesterday's Currencies: "Focus on Policy Mix Strengthen Dollar Bull Case", Brown Brothers Harriman's Marc Chandler again at his personal blog, Marc to Market:

The US dollar rally that moved into a higher gear in the second half of last week has begun the new week with a bang.  It is up against nearly all the major and emerging market currencies.  Even sterling, which last week, managed to eke out modest gains against the greenback is under pressure today. 

Of note, the US Dollar Index has made new highs for the year today edging briefly through 100.00.  The last December high was set near 100.50.  It had hit a low near 96.00 in the knee-jerk move when the election results had been clear.   Today's advance has lifted the intraday technicals stretched, and some consolidation is likely.  Support is seen in the 99.15-99.50 band.  

The euro dripped below $1.0730 in late-Asian turnover but is stabilizing in the European morning.  Sterling slid to $1.2464, off more than 1.25 cents.  The bounce in the European morning seemed to fizzle out ahead of $1.2550.  The greenback traded at JPY108 for the first time since early June.  The dollar was recording session highs against the yen in Europe.  The Turkish lira and South African rand are the hardest high among emerging market currencies.  The Mexican peso is off another 0.7% today.  
The driving force continues to be the anticipated shift toward the more fiscal stimulus, while confidence grows of Fed rates hikes, with the second in the cycle expected to be delivered next month.  The magnitude of the US stimulus the investors seem to be assuming will pass a Republican-controlled Congress has spurred a shift out of bonds, emerging markets, and gold.    These broad developments continue today.  

Bonds continue to sell-off, and as European bonds sell-off the risk premium over Germany is widening, and this will be a source of strain if it persists.    The 10-year Bund yield is up six bp, while the French yield is up nearly 10 bp, and the peripheral yields are up 13-14 bp.   The US 10-year Treasury yield is up nine basis points to 2.24%, it highest since the start of the year.  The 30-year bond yield is poking through 3.0% for the first time since January.  

The euro-sensitive US-Germany two-year interest rate differential is at 157 bp today, which is a new ten-year extreme.   It began the month near 145 bp.   The US 10-year premium has risen to 284 bp, the most since 2010.  The spread has widened by nearly 40 bp so far this month....MORE 
Here's two weeks of the U.S. Dollar Index (DXY) via FinViz: