Softer Yields Weigh on the Greenback

Today’s Highlights

• •    Two-week low 10-year Treasury yields keep the greenback on the defensive.
• •    The Chinese yuan rose it its best level in three years amid  record buying of Chinese A-shares by foreign investors through the HK-link 
• •    The US advised Americans not to travel to Japan due to the contagion.
• •    Europe’s Dow Jones Stoxx 600 posted a new record high, bolstered by information technology and real estate sectors.
• •    The German May IFO survey was stronger than expected, as the vaccination efforts have accelerated.
• •    The US reports new home sales and house price indices.  The strength raises questions about the Fed monthly purchases of $40 bln of agency mortgage-backed securities.
• •    Mexico reports April trade balance after a larger than expected $3 bln deficit in March.

The decline in US 10-year rates to two-week lows below 1.59% is helping rebuild bullish enthusiasm for stocks and weighing on the US dollar.

The NASDAQ reached two-week highs yesterday, and almost all the large markets in the Asia Pacific region rose, though India struggled. Europe’s Dow Jones Stoxx 600 is at a new record high, paced by real estate and information technology. US futures are firmer, pointing to a possible gap higher opening.

European yields are mostly 2-4 bp lower, and premiums over German are narrowing. The spread between Italy and German 10-year rates has narrowed more than seven basis points from last week’s peak, for example.

The dollar is on its back foot. The Swedish krona’s  0.65% gain is leading the move against the dollar. It is at a three-month high versus the greenback, while the euro and Swiss franc are about 0.30% higher. The Canadian dollar and Japanese yen are laggards and little changed. Emerging market currencies are also mostly higher. Hungary, whose central bank is expected to standpat later today, and Turkey, where a central bank’s deputy governor has been dismissed, are struggling.

Industrial commodity prices are firm, but July WTI is coming back offered after briefly rising to nearly $66.35.  A week ago, it set the contract high a little above $67. Gold remains firm but holding a little below last week’s high, around $1890.

Marc Chandler

Managing Director
Bannockburn Global Forex
www.bannockburnglobal.com