Thursday, June 21, 2018

Capital Markets: "Dollar Driven Higher"

First up, the US Dollar Index:
95.14, up .42 (+0.44%)

And from Marc to Market:
The half-hearted and shallow attempts by the currencies to recover appear to be emboldening the dollar bulls today, The greenback is higher against all major and emerging market currencies today. Demand for dollars is strong enough to offset the broader risk-off environment that is pulling stocks and core yields lower that is usually supportive of the yen. The greenback stretched to a week high near JPY110.75 today.

Asian shares were lower, and the MSCI Asia Pacific Index gave back yesterday's 0.6% gain that snapped a five-day decline. The negative sentiment is illustrated by the fact that the Moody's upgraded Samsung's credit (1st in 13 years) and Korea's shares still tumbled over 1%.

Chinese officials indicated another cut in reserve requirements was likely, but the PBOC failed to deliver today. Despite injecting more liquidity and tweaking its forward guidance, the PBOC could not prevent a further slide in Chinese shares. On the other hand, Australia continued to buck the regional trend and shrug-off worries about rising trade tensions. The S&P ASX 200 rose nearly 1% today to bring the five-day rise to a smart 3.6%.

European bourses are lower, though sterling's weakness is underpinning the FTSE 100. Healthcare and consumer staple sectors are performing well, while financials and utilities are the largest drags. Italy's bonds and stocks are underperforming. The equity market is off nearly one percent at midday, and the 10-year bond yield is up about 15 bp, while rest of the peripheral yields are up four-six basis points.

Two major central banks met. The Swiss National Bank left policy unchanged and repeated its refrain about the franc being over-valued and that it is prepared to intervene. Although it tweaked its inflation forecast higher, it warned of downside risks due to oil. It also recognized risks posed by Italy's new government. The franc is trading at its best level here in June against the euro. Norway's Norges Bank left rates steady as well, but it signaled a rate hike in September. The krone made a new marginal high for the year against the euro. However, the euro quickly recovered back above NOK9.40.

Against the dollar, the euro cannot find much traction. It has completely unwound the gains scored in the first part of the month, culminating in the initial response to the recent ECB meeting. Yesterday Draghi hinted at a material decision about the reinvesting of maturing bonds. Currently, the rules allow for flexibility and the proceeds have to be reinvested within three months. Imagine instead, it is the period is extended to say 12 months. This would appear to make the recycling that is a simple matter of course in the US into a potentially new powerful tool that could be used to support the market for longer....