Monday, June 5, 2017

Currencies: "US Dollar Starts Important Week Mostly Stable to Higher"

From Marc to Market:
The US dollar is beginning what promises to be an important week on a steady to firmer note against most of the major currencies. It is a holiday in parts of Europe (e.g.,m Germany and Switzerland). Although excitement is not until Thursday's ECB meeting, UK election, and the testimony of former US FBI Director Comey, there are several developments today to note.

The most surprising of these events was the decision by a Saudi-led coalition (Bahrain, UAE, and Egypt) to severe diplomatic and economic ties with Qatar over its support for Iran and Islamist groups. Air and sea travel have been suspended and Saudi Arabia has closed its border. Oil prices jumped on the news, but Brent's gains have been halved. Qatar's equities slid around 7.5%, and most regional bourses were lower.

Qatar is a rich country and holds stakes in a couple of European banks. The US forward headquarters of its Middle East Central Command is also located in Qatar. Japan and South Korea accounted for nearly 50% of Qatar's exports in 2015.

In another surprise, in the largest state election in Mexico, the PRI's candidate Del Mazo appears to have won; turning back a challenge by the populist-Left Morena's candidate Gomez. The peso has appreciated 1.8% in response, making it the strongest currency in the world today. The US dollar is holding a little above last month's low (~MXN18.2420), which itself was the lowest since the US election when the greenback traded as last as MXN18.1635. It has traded near MXN17.90 briefly last August.

Sterling initially opened a little softer after the terrorist strike over the weekend in London. However, it has been resilient, even in the face of the poor service PMI (53.8 from 55.8), which returned to its lowest level since February. The composite PMI slumped to 54.4 from 56.2 in April. It averaged 54.6 in Q1, but Markit suggests that it is still consistent with a rebound in the UK economy after 0.2% expansion in Q1.

Sterling is holding below its 20-day moving average (~$1.2920), which it has not closed above since May 25. The opinion polls have generally tightened, but many investors still appear confident that the Tories will hold on to a majority. In the options market, implied volatility remains firm, and the premium for puts over calls is edging higher.....MORE