Dollar Is Firmer, But Mostly Sidelined, As Equity Charge Continues

The US dollar is mostly firmer against the major currencies but is confined to narrow ranges, and well-worn ranges at that, but the focus has shifted to the strong advance in equities. Yesterday, the Dow Jones Industrials finally rose through the psychologically-important 20k level, and the S&P 500 gapped higher to new record levels.  

The Nikkei and Topix gapped higher too, helping lead the MSCI Asia Pacific Index to a 1% gain and the third rise this week. It is at levels not seen since Q3 15. Note that Australian and Indian markets were closed for local holidays.   

European equities are following suit. The Dow Jones Stoxx 600 is up about 0.5% near midday in London, led by financials and health care. This is the second consecutive session that it has gapped higher. Note, the beleaguered Italian banks are extending yesterday’s 3.4% advance with another 1.3% gain today. Barring a reversal ahead of the weekend, it will be the second consecutive weekly advance and seven of the past nine weeks. The FTSE Italia bank index has risen almost 60% since last July. However, the index peaked in July 2015 near 18,555. By last July, it had fallen to 6420. It is now near 10,100.  

Equities are rising as bonds sell-off. Unlike the last leg-up for yields, they are note being driven by US Treasuries. While the US 10-year yield is at new highs for the year (~2.54%), it is still about 10 bp below the peak recorded the day after the Fed hiked rates in December. European yields, on the other hand, consider that the 50 bp yield on the 10-year Bund is the highest since last January. The French 10-year yield is pushing above 1.0% for the first time since Q4 15. Over the past five sessions, the US 10-yield has risen almost eight bp, while the same yield in Germany is up 11 bp, 16 bp in France, and 20 bp in Italy.  

Japan’s 10-year yield is up 1.5 bp over the past week to yield eight basis points. The failure of the dollar to perform better against the yen as US yields and equities rise is frustrating many short-term traders. According to MOF data, Japanese investors sold foreign bonds last week for the first time this year, breaking a three-week buying spree. That said, the dollar may be carving out a double bottom against the yen after the penetration of last week’s low did not generate much follow through selling. A move above the JPY114.50 would boost the chances that the dollar’s low is in place, thought to confirm the double bottom, a move above last week’s high near JPY115.60 is needed. The measuring objective of the double bottom is back toward the JPY118.50 seen at the start of the year.