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Wednesday November 17, 2010

Euro-Dollar

 

The US dollar is trading strongly against nearly all of the majors as weakness across equity markets and commodities drive the enthusiasm for risk.  The euro continues to weaken in comparison to the US dollar, and the US dollar continues to strengthen versus the yen.  Elsewhere, China tightening fears fueled safe haven trading after it had a ripple on global markets after the SSEC dropped almost 4%.

 

Global equity markets are mostly weaker as South Korea’s rate hike indicates that more EM central banks are raising interest rates to combat inflation.  The MSCI Asia is down 0.6%, and the Shanghai is down nearly 4%, led by 6% losses in materials and energy.  In Europe, the equity retreat sees a 1.3% loss, and the Dax is down 0.5%.  The Euro Stoxx 600 is down by 1.1%.

 

European sovereign bonds are mostly up.  Ireland’s 10-year yield is up 17bp, Greece’s yield is up 6bp, and the yield on 10-year German bunds is flat with 10-year gilt yields down 3bp.  The yield on the Japanese 10-year is down 1bp, and the US 10-year yields are down 5bp1.

 

 

At the eurogroup meeting, there was continued discussion for a bank aid package from the EU emergency fund for Ireland, though PM Cowen insists that the government does not need external help.  Cowen says he is instead concerned about the health of the private sector banking institutions.  Since the emergency fund cannot lend to banks and will instead have to lend to the government instead, the emergency funds may have to go to the government anyway.  Pressure on Ireland to go to the EU has been increasing amid the current market tensions and possible contagion effects with the ECB threatening Irish funding and a continued rise in bonds yields.  It appears the bailout package may be forthcoming, but would also serve as a temporary solution to the problems in Ireland.

 

A little more than a year ago the PBOC governor proposed a supra-national reserve asset, like the IMF’s Special Drawing Rights to supplant the role of the US dollar.  This topic continues to be discussed within market participants.  China’s yuan remains inconvertible. 

 

After several months of a downshifting in US treasuries, where from April until July foreign purchases averaged $38 billion, the foreign purchases of Treasuries in August skyrocketed. There was additional improvement in both private and official flows.  Meanwhile, the demand for agency debt and corporate bonds and stocks continued to plummet.