Euro Recovery Continues, Posts New Six Week High; Other Currencies Mixed

(greetings from Tokyo)

Growing confidence that Le Pen will not be the next president of France following the televised debate for which two polls showed Macron doing best has lifted the euro and reduced the French interest rate premium over Germany. The euro pushed through $1.0800 after initially dipping below yesterday’s lows. 

The outside day (engulfing pattern) would be strengthened with a close above yesterday’s high, a little above $1.0775. The next target is the February 2 high near $1.0830. It reached almost $1.0875 following the ECB’s decision in December to extend QE longer than had been anticipated but at a reduced pace of 60 bln a month (down from 80 bln).  

The US two-year premium over Germany peaked nearly two weeks ago near 223 basis points. Today it is near 205 basis points, the lower end of where it has been over the past month. The US 10-year premium peak shortly after last Christmas near 235 basis points. Today it is just around 202 basis points. Over the past four months, it has only closed below 200 basis points once.  

While the euro is outpacing the other major currencies, it is dragging up other currencies against the dollar, including sterling, the Swiss franc, and the Scandi currencies. Core bond yields are 2-3 basis points firm, but peripheral yields are a bit softer. European stocks are heavy, and the Dow Jones Stoxx 600 is threatening to snap a three-day advance.  

The MSCI Asia Pacific Index and the MSCI Emerging Market Index continued to rally. Each is posting their eighth consecutive advance. The former is up 10.2% year-to-date, while the latter has risen 13.2%. In contrast, the S&P 500 has fallen for three consecutive sessions coming into today and four of the last five.  

For the fifth day, the dollar taken out the previous day’s low against the yen. It is also the fifth day of lower highs as well.  he dollar recovered to approach yesterday’s highs but stalled. Intraday technical indicators warn that more work may be necessary at lower levels before a base can be from which to launch an assault on JPY113.00