Published: Fri, 27 Mar 2009 15:57:53 +0100

Morning Market Recap: U.S. Dollar in Focus After Overnight Gains

(CEP News) - The U.S. dollar is in the spotlight Friday morning following broad gains made against most major currencies overnight.

The U.S. dollar has broken through a six-day range against the euro, sterling and Canadian dollar. According to currency strategists, the selloff was initiated when investors moved out of the euro and into U.S. dollars.

The euro is down 0.0225 to 1.3302 against the U.S. dollar. The U.S. dollar is down 0.70 to 98.03 against the yen and the Dollar Index is up 0.885 to 85.050.

The Canadian dollar is down 0.0096 to 0.8063 against the U.S. dollar (1.2402 USD/CAD) and down 1.20 to 79.03 against the yen.

Currency strategists from Citigroup released a report Friday morning saying they have liquidated their long EUR/USD position. They said they were "disappointed" in the lack of follow-through in the cross following the quantitative measures initiated by the Fed.

"Ahead of the ECB meeting next week, we feel that there is little benefit in staying with the trade in such a directionless market," the Citigroup economists wrote in the report. "The strategy of selling 'QE currencies' is becoming more difficult to trade as the adoption of QE spreads through G10 economies. Nevertheless, we expect USD weakness to remain a dominant theme."

U.S. data has not had much impact on markets Friday morning despite a modest upward revision in March U.S. consumer sentiment. The final consumer sentiment survey from Reuters and the University of Michigan for March was revised up from preliminary estimates, bringing the headline index higher to 57.3 compared to the preliminary 56.6 level. Economists were expecting an upward revision to 56.8.

Personal income fell slightly more than expected in February and personal spending moved higher, according to a report released by the U.S. Department of Commerce. Annual core PCE climbed to 1.8%, two-tenths below the Fed's unofficial target level of 2.0%.

The rise in the U.S. dollar also correlates with a drop in equity markets, but some strategists are attributing the selloff to the lack of any more bullish news. The moves in equities could also be more technical as traders take some profits after massive gains made earlier in the week.

Since Monday, the Dow Jones Industrial Average has gained 7.3% and the S&P 500 gained 6.4% since the start of the trading week.

The DJIA was down 127 points to 7798, the S&P 500 was down 13 points to 820 and the Nasdaq was down 26 points to 1561.

Canadian stocks are also retreating Friday, with Toronto's S&P/TSX composite index is down 131 points to 8864.

European stock markets closed with the Eurostoxx down 27 points to 1817, the UK FTSE 100 down 39 points to 3887 and the German DAX down 88 points to 4171.

Asian markets were mixed, with the Japanese Nikkei closing down 9 points to 8627 and the Hang Seng Index up 11 points to 14120.

Jeffrey Rubin from Birinyi Associates said the S&P appears to be in overbought territory and is recommending to sell the index.

"The market having now gained over 20% in 17 trading days, which is the quickest 20% gain since June 1938," he said. "We believe the current trading environment requires investors to concentrate on the short-term and particularly where stocks are trading relative to their 'normal' trading parameters."

The dip in equities appears to be having some an effect on Treasury markets as U.S. bond yields move lower across the board. The 2/10 curve shows some signs of flattening with the short end outperforming the longer term bonds.

U.S. two-year yields are down 3.2 bps to 0.88%, with five-year yields down 2.3 bps to 1.77%, 10-year yields down 0.9 bps to 2.73% and 30-year yields down 2.5 bps to 3.63%. The Eurodollar September 09 contract is up 4.0 ticks to 98.85. The yield curve is steeper, with the 10/2-year spread up 2.3 bps to 189.69 bps.

The Canadian 10-year note is yielding 15.82 bps more than the U.S. ten year note.

Yields on two-year Canadian government bonds are down 2.1 bps to 1.16%, with five-year yields down 3.0 bps to 1.87%, 10-year yields down 0.6 bps to 2.89% and 30-year yields down 0.9 bps to 3.64%. The September 09 BAX contract is up 2.0 ticks to 99.49.

In Germany, returns on two-year German bonds are down 10.6 bps to 1.31%, with five-year yields down 3.4 bps to 2.33%, 10-year yields down 5.2 bps to 3.08% and 30-year yields down 9.8 bps to 3.92%.

Yields on UK two-year bonds are up 0.6 bps to 1.29%, with five-year yields down 0.5 bps to 2.48%, 10-year yields down 1.7 bps to 3.29% and 30-year yields flat at 4.27%.

Commodity markets are also weaker today. WTI crude oil is down $2.17 to $52.17. The front month gold contract at the Chicago Board of Trade is down $14.20 to $926.00 per ounce.

By Neils Christensen, neilsc@economicnews.ca, edited by Stephen Huebl, shuebl@economicnews.ca