The dollar is finding better traction today, building on the upside reversal seen before the weekend. The news stream has been light and it seems like primarily an issue of positioning rather than a change in sentiment or the consensus narrative. The focus has shifted from monetary policy and idea that the ECB and BOJ are exiting their extraordinary monetary policy to return of the twin deficit problem in the US.
One of the twins, the budget deficit occupies center stage in the US today. It is not so much the deficit as the paying for it. That is the US Treasury will raise a boat load of money today. It will issue $96 bln in three- and six-month bills, and $55 bln in a four-week cash management bill. It will also sell $28 bln of two-year notes. In the next two days it will raise another $80 bln in other note sales.
The anticipation of this supply has pushed short-term rates higher, but it has yet to appear as a material force in the cross-currency basis swaps. The US debt market appears to have been building in a concession ahead of the new supply. The yield of the entire coupon curve is about three basis points higher. Global yields are mostly firmer. Sweden is a notable exception.
Despite one of the most aggressive monetary policies, strong growth and a large current account surplus, the Riksbank has been unable to create inflation. Today, Sweden reported a 0.8% decline in January CPI, which was a bit more than expected, and pushed the year-over-year rate to 1.6% from 1.7%. The market had expected a small increase. The underlying rates, which uses fixed mortgage interest rates, fell 0.9% (median in the Bloomberg survey was for a 0.7% decline) and the year-over-year rate eased to 1.7% from 1.9%. This is the slowest underlying rate since March 2017. The krona is the weakest of the major currencies today, losing 1.1% against the dollar and 0.6% against the euro.
The Australian dollar is slipping to a new four-day low. Support is seen in the $0.7855-$0.7880 band. The minutes from the RBA's recent meeting failed provide new insight, and the Australian dollar's weakness seems to be a function of the US dollar's broader recovery. Inflation is expected to increase only gradually, and while household debt is elevated, low rates help prices and employment.
The German ZEW survey slipped. The measure of the current situation eased to 92.3 from 95.2 and the expectations component fell to 17.8 from 20.4. On one hand, the German economy continues to motor along. On the other hand, political uncertainty lingers, and perhaps more importantly, the DAX fell almost 12% from January 23 peak to the low on February 9. The recovery so far has been rather flat, not event reaching a 38.2% retracement of the sudden drop.
Indeed, the heavier tone in the European equity markets yesterday spilled over in to Asia. The MSCI Asia-Pacific Index ended a six-day rally to close nearly 0.9% lower. It recovered nearly 50% of its loss from late January before moving lower today. Of note, disappointing HSBC earnings seemed to cut short the recovery in the Hang Seng, which finished 0.8% lower. Foreigners were sellers of shares in the region....
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