After yesterday's dollar gyrations, today's narrow ranges are a relief. The dollar had rallied in Asia and Europe yesterday, but reversed lower following the disappointing April data, especially industrial output and manufacturing figures, which raised questions for about the strength of the recovery.
First quarter US GDP is now widely expected to be revised to show a contraction of between 0.5% and 0.8%. The rebound in Q2 is being downgraded by some economists. While recognizing that the optics were not good, we caution against the pessimism, and note that weekly initial jobless claims, one of the best real-time metrics of the economy, fell to new cyclical lows. And the regional Fed surveys, like the Empire State and the Philadelphia reports, suggest the economy is continuing to recovery from a poor first quarter.
The dollar sold off yesterday in the North American session, but there has been no follow through today among the major currencies, with sterling being a small exception. It pushed a little through yesterday's high. There is little momentum, and the $1.6820-40 area is likely to block stronger gains into the weekend.
Importantly, US Treasuries have also stabilized just above the 2.50% threshold. This is true for "core" bond markets in general today as bunds and gilt yields are a couple of basis points higher after yesterday's sharp decline. Peripheral bond yields are mixed. Bargain hunters have returned to Italy and Spain, but not Portugal and Greece.
Reports yesterday that there is a new retroactive tax on foreign investment in government bonds was denied. Essentially, it appears that foreign investors who bought Greek bonds between in the 2012-2013 period will be taxed based on the legal framework that existed then. Investors from countries with tax treaties that avoid double taxation are not subject to the tax, while the capital gains tax
