Dollar Marks Time

The US dollar is little changed against the major currencies as yesterday’s moves are consolidated and traders wait for fresh developments.  Global equities were higher after Wall Street’s advance yesterday. Asia-Pacific bond yields were firm, following the US lead, but European 10-year benchmark yields are lower, led by the continued rally in Greek bonds after an agreement was struck that will free up a tranche of aid. 

The relative stable capital markets are itself news. Last summer and again earlier this year, weakness of Chinese yuan and equities were a major disruptive force.  Earlier today the PBOC “fixed” the yuan at its lowest level since March 2011. The dollar has been trending higher against the yuan steadily even if slowly all month. Today it is at three-month highs. 

Chinese equities were the only Asian market to weaken today. The MSCI Asia-Pacific Index advanced 1.5% today off seven-week lows seen earlier in the week. The HK China Enterprise Index was up 2.7%. China’s markets were off 0.25%, and year-to-date are off 20%-22%.

Yesterday the Wall Street Journal thought it was news that China is not letting market forces drive the yuan. We have long discussed the gap between China’s declaratory policy and its operational policy. Today Bloomberg report that the Chinese delegation to the upcoming Strategic and Economic Dialogue talks (June 6-7) is keenly interested in whether the Fed hikes in June or July.   

The report claims China would prefer July. Can it really make that much of a difference? Is this a topic for a strategic discussion?  Even though the Federal Reserve may practice a type of democratic centralism that is familiar in China, can Yellen (Fed chair often attends the talks) commit one way or the other, and even if she could, would she (or the US) want to?  

Moody’s downgraded Germany’s largest bank to start the week, and now the CEO of Italy’s largest bank has stepped down, clearing the way apparently for a capital campaign. The Dow Jones Stoxx 600 is up 0.8% as the financials continue to outperform (+1.4%).The news stream in Europe has been mostly limited to the German May IFO, which was better than expected, and the Italian industrial sales and orders were weak.