Yesterday's steepening in the US yield curve has remained a prime focus for markets. Concerns that the rise in rates and the associated increase in US mortgage rates could choke the US economic recovery have weighed on European stocks. While EUR/USD has moved off its lows, the generally firmer USD is consistent with the general rule that higher yields are currency positive. The yen has been the biggest mover today, tumbling against both the USD and the EUR.
It follows that higher US yields should support USD/JPY, particularly given Moody's reaffirmation of the US's triple-A credit rating yesterday. But it is likely that the sharp drop in the value of the yen has been accentuated by flows reported in the wires overnight of large JPY sales by retail investors. Japanese retail investors yesterday alone reportedly poured USD2.4 bln into new mutual funds which target overseas assets. USD/JPY has run into resistance at 97.00, EUR/JPY has seen an even greater move pushing up to the JPY134.60 ahead of the JPY134.85 months high.
Upside in the EUR this morning was supported by far better than expected German unemployment data. Joblessness rose by just 1K sa in May far below the 64K consensus estimate. The market should be cautious, however, since the -6.9% y/y decline in GDP in Q1 and the dependence of the German economy on its export sector suggest that Germany's economic recovery will be slow.
Sterling has given back some of yesterday's gains. Comment's from Blanchflower, who is exiting the BoE's MPC, have refocused the market's attention on the likelihood that this recession could see a 1 mln rise in UK unemployment this year. These remarks are not groundbreaking, however, and sterling continues to reflect a lot of bad news on its price; the impact from these comments was not substantial.
This afternoon, focus will be on the US 7yr auction, on durable goods data and on new home sales.
