More Euro Weakness that Dollar Strength

<br /> More Euro Weakness that Dollar Strength – Marc to Market<br />


The US dollar is edging higher against
most of the major currencies in a session devoid of much news. 
The Canadian dollar and the Japanese yen are the
exceptions. The euro is the weakest of the majors; off about 0.3% near $1.0650.
 After a strong advance yesterday, sterling just missed recording an outside up day
and is consolidating yesterday’s gains in a narrow range.  
politics is widely cited as an important
The most
obvious metric is the premium being paid over Germany.  Yet the premiums narrowed a little yesterday and are narrowing a
little today.   Moreover, on the one hand,
some observers argue investors are not taking the political risk seriously
enough, and on the other hand, other accounts emphasize how much the spreads
have widened already.  How can the Stiglitz scenario be discounted?
 He suggests the monetary union could blow up this year.  
The US 10-year
yield is holding below the 2.40% that was
breached yesterday. 
 Recall the yield peaked the day
after the December 14 FOMC decision to hike rates near 2.64%.  It fell to
2.30% on January 17 and recovered over the next week to 2.54%.  It has
been drifting lower.  The March 10-year note futures peak on January 17 at
125-13.  Yesterday, it reached 125-10.  The 125-16 area is the 38.2%
retracement of the sell-off since the US election.  The BOJ targets the
10-year yield and has had to become more active in defending it as rising
global rates exert some upward pressure on Japanese rates.    
Although the
dollar-yen rate is sensitive to US rates and the differential with Japan,
 the greenback has been resilient in the
face of the latest decline in the Treasury yield.  The dollar remains
within the roughly JPY111.65-JPY112.80 range established on Monday.  Still, until the dollar resurfaces above
JPY112.80, the technical tone is vulnerable.  
The correlation
between the dollar-yen rate and the Topix (percent change, 60-day rolling) is
about 0.37, which is the highest since last September.
  The correlation between dollar-yen
and the S&P 500 is has slipped to 0.18.  It was above 0.5 for most of
the first nine months of 2016.  
Perhaps it is
the lack of other substantive news, but many are talking about the decline in
China’s reserves below $3 trillion.  
 But there is little here besides the obvious.  First, for all
practical purposes reserves at $2.9982 is the same thing as $3 trillion.
 Second, there is nothing critical about $3 trillion. Moreover, we suspect
Chinese officials do not simply look at the value of the reserves in dollar
terms, but also in SDRs.  Third, yes, China is still experiencing capital
outflows.  However, China is not likely to respond by having a dramatic
change to its managed float, as some have suggested.  Instead, China is
more likely to use formal and informal controls to limit the capital outflows.
 Fourth, the yuan appreciated by 0.9% last month and is up nearly 0.2%
this month. The stabilization of the currency and the premium of the offshore
yuan (CNH) over the onshore yuan (CNY) may suggest that there may be less
speculative flows and perhaps more business flows, such as paying back some
previously borrowed dollar, tourism (related to the Lunar New Year) and direct
With today’s
slippage, the euro has retraced 38.2% of the rally from the year’s  low
near $1.0340 at the start of the year. 
 A convincing break of this area (~$1.0645)  requires a push below the
end of January low near $1.0620 to see a test on $1.0585, the 50% retracement
objective and previous congestion area.  A move above $1.0665 may help
steady the single currency.  
Sterling has been confined to about a half a cent range at
the upper end of yesterday’s range. 
The strong momentum eased in the US
afternoon.  A break of the $1.2430- $1.2440 area would suggest that
yesterday was a bit a head fake.  Rather than a running start at the old
highs and perhaps $1.28, it could be a bull trap.  
The Aussie is
holding below $0.7700 but found a good bid ahead of $0.7600. 
 A move above $0.7640-50 would spur another run at
$0.7700, which proved a real nemesis last year.  The US dollar dipped
below CAD1.30 briefly last week, and with the help,
softer oil prices (and the API estimate of a large build of US oil inventories)
helped the US dollar recover to CAD1.3200 yesterday.  It is consolidating
yesterday’s gains today.  Support is seen
in the CAD1.3130-CAD1.3140 area.  


More Euro Weakness that Dollar Strength
More Euro Weakness that Dollar Strength

Reviewed by Marc Chandler

February 08, 2017

Rating: 5

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