Friday, June 16, 2017

"Dollar Slips In Consolidation, but Extends Recovery Against the Yen"

From Marc to Market:
As the market heads into the weekend, the US dollar is trading softer as it consolidates. It is within yesterday's ranges against the major currencies but the Japanese yen.

The dollar has made a dramatic recovery against the yen. It traded near JPY108.80 in the middle of the week and pushed through JPY111 in late in the Tokyo morning. The greenback is above its 20-day moving average against the yen for the first time in a month.

It is not clear what triggered the dollar's recovery. There is some thought that the driver is Japanese investors taking advantage of the yen's strength to step up their foreign bond buying. US 10-year yields, to which the dollar-yen exchange rate is sensitive, has recovered from the midweek dip to 2.10%. However, at 2.17%, the yield is still off by three basis points on the week.

The BOJ meet and as widely expected kept its full complement of unorthodox policies intact. It is clear from the central bank meetings over the past two weeks that the BOJ intends to lag behind the other major central banks. This has been our conviction, but it was strengthened by Governor Kuroda's comments. He was reluctant to talk much about the exit except to note that such a discussion is premature and could lead to confusion.

Outside of the BOJ and the SNB, other central banks, like the European Central Bank and the Bank of Canada have begun preparing the market for a less accommodative stance. The ECB is expected to announce a reduction of its purchases (currently 60 bln euros a month) in September as it extends its purchases into the first part of 2018. The Bank of Canada signaled it too is reconsidering the extent of accommodation needed given the pick-up in economic activity and strengthening of the labor market.

The three dissents at the Bank of England was surprising, and this sent sterling higher. Nevertheless, many, including ourselves, doubt that with a backdrop of political uncertainty, weakness in earnings and a pullback by consumers, a rate hike is unlikely. In fact, we suspect price pressures will ease as the 8% decline in sterling last June drops out of year-over-year comparisons.

The dollar is not finding nearly the same traction against the euro as it has against the yen. European interest rates are rising, and this has eroded the US premium. Consider that the German two-year yield is up nine basis points this week, while the US is flat. The German yield is at it highest since last November. The US premium has fallen below 200 bp for the first time since late May. After two Fed hikes this year, at 198 bp, the premium is three basis points above where it finished 2016....MORE 
The last couple weeks action in the US Dollar index: