Greenback Falls

With US
corporate results continuing to surprise on the positive side which in turn is
fuelling increased risk appetite. The Dollar accordingly came under renewed
pressure with investors again off-loading the Greenback to invest in equities
and commodities as well as in the commodity based currencies. This latter
strategy is especially attractive at present with these currencies currently
offering a big pick up in yield when compared to that of the US currency.
So, the Aussie reached a post-floatation high at 1.0775 and with the Dollar
index hitting a 3-year low, both the Euro and Sterling touched 16-month highs
at 1.4640 and 1.6517 respectively. Gold was up again and USD/CHF hit an all
time low. One can argue that with ongoing developments in the Eurozone debt
market and continued evidence of economic recovery in the US that the
spot market has got it wrong but that would be a bit like King Canute trying to
turn back the tide. Go with the flow but watch carefully for the turn in
sentiment.

Back to Europe. The 2 debt
offerings, from Spain and Portugal were
better received than had been feared with the former successfully auctioning 10
and 13-year bonds, admittedly needing to pay a higher yield but on the positive
side, garnering better coverage than at the last similar offering. Portugal
also achieved its desired cash raising, via a 3 and 6-month bill sale, but in
this case, not only was demand down but the yield demanded was higher than the
last, pre-bail-out, rate. This doesn’t make any real sense and obviously
indicates the market’s trepidation over the future path of the country’s
financial well-being. With a further escalation of fears of a Greek debt
restructuring as well as concern over the Irish demands for a renegotiation of
the terms of its own bail out, the correlation between bond yields of the
Eurozone constituent states was become fractured. Yields on 10-year bonds
issued by Greece, Ireland and Portugal are respectively 15%,
10.5% and 9.3% compared to the yield on 10-year German bunds of 3.3%. If the
market’s perception was that the current problems were containable then spreads
of this magnitude would not exist. Numbers say more than words ever can…..

Today we are scheduled to get a breakdown of the March UK
retail sales which following the sharp drop in February are expected/hoped to
pick up a bit with the possibility of a small positive monthly result. A German
IFO survey is also due this morning which will likely reflect current thinking
of reasonably positive current trading conditions but fears for the future.
Overall should be a positive backdrop for Sterling/Euro and enable a small
recovery in the Pound’s current weakness.

Yesterday, the Riksbank (as expected) raised its official
interest rate by 25 basis points and with confirmation that they expect
inflationary pressures to pick up, are anticipated to signal a further 4 rises
of 0.25% over the rest of the year. This would produce a rate of 2.75% by
year-end. The Brazilian policy committee also raised rates but by less than
expected, just 0.25% to give a new official rate of 12%.

Report by Philip Ryan