US Interest Rates Dip on Foreign Demand

Swissy Rallies to Record High on Safe Haven Flows

The US dollar index continued to trade heavy through last night’s Asian and European sessions following Wednesday’s US Treasury bond auction that saw prices firm considerably and yields drop dramatically on significant buying interest.  The auction was held for 7-year securities, those specifically targeted by the Fed’s quantitative easing program in an effort to bring down USD interest rates and while the end result would have brought a smile to Ben Bernanke’s face, the bids were mostly emerging from Asia.  A very strong bid to cover ratio for the $29B auction, which signaled strong demand for the US paper, resulted in a record volume of bonds being purchased by foreign interests at 64.2% of what was offered.  The yield on those bonds retreated to 2.83% and the US dollar has continued to shed value overnight in falling more than a percent on a trade weighted basis to again exchange hands with a 79.0 handle as investors the world over continue to seek safe harbor for their capital amid the ongoing sovereign risk concerns in Europe.  As might be expected, sterling took a pounding alongside the dollar though the euro actually held up relatively well, especially considering the fact that a quiet data calendar across the pond delivered very little support for the common currency.

On the opposite side of the ledger, the Swiss franc advanced to a fresh all-time record high against both the EUR and USD overnight as investors continue to select the Swissy as the preferred store of value given the economic turmoil in the US.  The yen also continued to pick up bidders overnight, trading to a fresh 7-week high against the dollar with the decline in USD yields.  That said, one could also characterize the day’s price action not so much as a flight to safety but as a flight from the pound and dollar, as the Aussie again traded to a 28-year high against the dollar amid the mass exodus of investment capital.  It seems while a great deal of liquidity was flowing into US Treasuries as a store of value, a good portion of the currency risk was being swapped for higher yielding alternatives to the slumping Greenback as the Antipodean currencies have fared quite well in early trading this morning.  The strategy for hot money managers overnight then seems to be find a safe place to park cash (Treasuries), but don’t dare actually leave those USD funds unhedged.  

While there was no shortage of trading taking place on the heels of the Treasury auction, last night’s fevered activity has died a quick death this morning as the reality of holiday trading conditions again begin to take hold.  To that end, while we’ve seen some rather dramatic price action on the past 24 hours, one must keep in mind that the moves are being exaggerated by thin conditions and reduced liquidity, therefore reducing the importance of the day’s activity in terms of sending true price signals.

CAD Remains Tethered to Parity
If there was a great deal of activity in currency markets overnight, someone forgot to pass the memo to all of the USDCAD traders.  Thanks to a momentary spike lower, USDCAD traded in a 54-point wide range overnight, though the vast majority of the session was contained within a much narrower 20-point range centered on parity.  Both implied and actual volatility levels continue to come in as the price action concentrates, a situation that often results in a significant break in the end, though it is hard to imagine what might cause such a move at this point in time.  With the Canadian data calendar bare on the day, USDCAD will take its cues from data emanating from the US as well as the broader market for risk.

The US calendar has seen two rather significant upside surprises this morning.  Initial jobless claims came in well under expectations last week, though this reading could be more a function of reduced filings during the holiday season than a real firming in labor market conditions.  That said, the Chicago Purchasing Manager’s Index, a key leading indicator of manufacturing activity in the city, came in well above expectations as well.  The market is still expecting to see the release of pending home sales and natural gas storage figures later today.
Mark Frey, Regional Director for Corporate Canada