Weekend Election And North Korea Rhetoric Helps Greenback Remain Firm

The US dollar is firmer against most major currencies today. The implications the Jamaica coalition in Germany is understood to be less likely to support a new vision for Europe in the aftermath of Brexit and the Great Financial Crisis.   

The euro’s low for the year was set at the very start near $1.0340. The first quarter or so was spent consolidating the gains in H2 16. It was trading below $1.06 in early April. However, the turn, in the form of a gap higher opening on April 24, as it becomes clear that the so-called populist-nationalist moment was not sweeping through Europe. This coincided with an inflation scare that sent the euro toward $1.15 by mid-year. 

The euro has been consolidating its gains this month and appears to have carved out a topping pattern. Perhaps it has been helped by a seeming pattern of unsourced European official comments when the euro pokes through $1.20. Momentum traders are getting frustrated. It has become more expensive to short the dollar against the euro. The spread between US Libor and the one-year cross-currency basis swap is near -35 bp which is dearest the dollars have been here in H2 (the spread bottomed at the end of last year near -52 bp). The two-year interest rate differential is near 2.14% today, the highest since March. It has steadily climbed since the end of Q2 when it reached almost 1.90%. 

The euro is making a new low for the month today. A convincing break of $1.18 would seem to confirm the topping pattern. The initial objective is near $1.16, though last month’s low was seen near $1.1660. A more aggressive target is near $1.1425, which corresponds to a 38.2% retracement of this year’s gains. There is an option for nearly 980 mln euros struck at $1.1825 that expires in NY today. 

If the euro-dollar exchange rate has become a bit less sensitive to interest rate differentials, the dollar-yen rate remains very sensitive. The correlation (on percent change) over the past 60 sessions of US 10-year yield and dollar-yen remains historically high (~0.81). In fact, it does not look like it has been higher since at least 2000 than it is today. The 10-year US Treasury yield reached a high on September 20 near 2.29%. The dollar reached a high against the yen the next day near JPY112.70. Both have eased since, and today initial support in both markets is seen near yesterday’s lows (~JPY111.50 and 2.21%). There is a $660 mln option struck at JPY112 that expires in NY today. It may not be in play unless US yields pop.