Ralph Shell @ 1:31 PM, Monday December 27 2010
The holiday weekend blizzard, which has paralyzed US East Coast travel, has not interfered with this week's US Treasury auction of $99B two, five and seven year notes. Today the Treasury is selling $35B two year notes which will be followed by the same quantity tomorrow, of the five year note, then $29B seven year notes on Wednesday. For the past month the US short rates have been gaining on the German rates. On November 19th, there was a 60 basis point premium of German 2 year notes, a .50% yield for the US paper, versus 1.10% for German notes. Today, with the US rates firmed in front of the auction, the US 2 year note is yielding .72%, versus .95% in Germany.
The US current yield on the 5 year note, 2.11% US, above the 1.94% which the German paper is yielding. Is the 17 basis premium of the US 5 year notes enough to attract some international money back into the US? There is more to that calculation than just the rates, but the potential difficulties with euro debt restructuring next year, combined with the US rate premium favors the USD versus the euro.
What will be 2011's favorite safe haven currency?
One of the big moves during the past year has been the gain in strength of the Swiss Franc versus the euro. After trading at 1.54 in March the franc, much to the displeasure of the Swiss National Bank, has appreciated sharply. Viewed as a safe haven in Europe, one euro now buys only 1.2635 francs. The Swiss National Bank did intervene, but to little avail. With the Euro Central Bankers now confronted with the daunting task, refinancing sovereign and private debt, the Swiss move in retrospect seems justified. The question is, has the market placed full value on the spread between the safe haven Swissie and the debt troubled euro?
The Japanese yen has long been favored as a place to park scared money. With latent economic troubles lurking in Japan, is it possible the SF could be favored as the new safe haven champ and gain on the yen? Recent strength in the yen, has, in part, been attributed to the year end repatriation of corporate profits. Later today there will be Japanese announcements of the levels of economic activity, including the CPI, Unemployment Rate, and Retail Sales. This should give a comprehensive overview of the intensity of the Japanese recovery.
Over the Christmas holiday, the Chinese again increased interest rates, another attempt to slow their economy. Should they eventually be successful, this would be a headwind for the Japanese economy, as China is Japan's biggest trading partner. So far, this potential negative for the Japanese economy has been ignored by the market.
If it is possible that the SF remains everyone's safe haven and the Japanese encounter some troubled times, might the SF gain on the yen? The CHF/JPY had rallied up to almost 88. last week but has since sold off to 86. There looks to be some support in the 85.00 to 85.50 level. It is a thin market this week, so some new Japanese numbers may give us expanded moves. Lets try to buy the CHF/JPY in the 85.00 area, and see what happens after the surge of year end yen buying abates.
Author: Ralph Shell - ForexRazor Analyst - Graduated from a small Ohio liberal arts college. Graduate studies in economics and history at Duke University. Ten years experience trading cash commodities in domestic and export markets. Former commodity analyst with Merrill Lynch in Chicago. Member of and floor trader at the Chicago Board of Trade for 18 years.