Global Briefing: Focus Turns to European Rates

Stocks and bonds rallied and the dollar recouped some of its losses.
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Global bonds and equities are generally enjoying an advancing session, while the dollar is recouping some of yesterday's sharp losses. The absence of key U.S. economic data today will allow the markets to focus on the likelihood of interest-rate cuts tomorrow by the European Central Bank, the Bank of England and Denmark's central bank.

Japan's sale of 600 billion yen of 20-year bonds was better received than many observers expected, allowing the yield on the benchmark 10-year bond to fall 10 basis points to 1.70%. The bid-cover ratio of 1.94 represented an improvement from the 1.67 bid-cover ratio of the previous 20-year bond sale in January. The auction produced an average yield of 2.585%. The


eked out minor gains, rising less than 0.5%. The Nikkei still seems technically vulnerable. Negative divergences continue to be evident on the momentum indicators.

Yesterday's gains in the yen had threatened key dollar support and elicited a response from Japanese policymakers.

Sakakibara warned against the premature strengthening of the yen and his deputy Kuroda chimed in with a similar warning. A key trend line for the dollar, drawn off this year's lows recorded in early January, comes in near 119. A successful violation of this area would likely trigger sharp dollar losses and yen gains -- something Japanese officials are not prepared to sanction.

Judging from the pattern of official comments, one is left with the impression that if Japanese officials had their druthers, the dollar would hover slightly above the 120-yen level. While official jawboning appears to have done the trick today, unless the dollar resurfaces above the 121.30-yen level, pressure on the dollar could resume later today or tomorrow.

Japanese officials are not the only ones trying to verbally guide the foreign exchange market.

The governor of the French central bank and tipped as the new president of the ECB,


warned that the euro was close to levels that could prompt the ECB to take action to preserve its value, even though there is no official foreign exchange target. These appeared to be the strongest comments to date of concern over the euro's weakness. The euro did stage its biggest one-day rally yesterday, but not so much in reaction to Trichet's comments as the initial reports of a unilateral ceasefire by Serbian forces.

The news triggered a short squeeze, forcing interbank dealers and other speculative forces to buy back their previously sold euro positions. The danger is that this position-adjusting takes some of the juice away from the bounce in the euro I anticipated to take place after the ECB cuts rates tomorrow. Nevertheless, that scenario still seems the most likely.

That said, if the euro closes below $1.0765 today, my confidence of a euro recovery would weaken.

Corresponding resistance for the dollar against the Swiss franc comes in near 1.4825 francs and it requires a convincing move through this area to signal a resumption of the greenback's uptrend.

European bond markets are holding onto yesterday's gains, the largest in nearly a month. The yield on Germany's two-year note has fallen 40 basis points since the beginning of March and stands near the nine-year low set yesterday as the market prices in the strong likelihood of a near-term rate cut by the ECB.

European equities are mostly higher, with the U.K.'s FTSE leading the way to record highs.



is approaching its record high set in early February near 4354, while Germany's


trails behind. Its record high was set in early January above 5500, while it currently stands near 5050. Bank shares in Europe are being helped by rate-cut ideas. Profit-taking was reported on issues that have recently run up, like autos and mobile phones.

The batch of U.K. data released today won't likely dissuade the BOE from cutting interest rates tomorrow, at the end of the two-day meeting of the monetary policy committee. Manufacturing output fell 0.1% in February, a touch less than the market consensus forecast. On a year-over-year basis, manufacturing is off 1.4%. The three-month-over-three-month rate is still negative (minus 0.8%), suggesting that the U.K.'s manufacturing sector is still in a technical recession.

The broader measure of industrial production was 0.1% higher in February as the 0.6% rise in utility output and a 1.2% increase in mining offset the decline in manufacturing. Meanwhile, the CIPs service sector survey saw a strong rebound. The February series was revised to 49.4 from 48.4 and the March reading jumped to 53, the first time above the 50 boom-bust line since last October. Sterling has stabilized after yesterday's selloff. There is potential now for a short-covering bounce toward $1.61.

The Canadian dollar could turn out to be among the biggest beneficiaries of European rate cuts tomorrow

, but the key might be Friday's employment report. Canada is expected to have created 20k-25k jobs last month. A weaker-than-expected report, coupled with last week's soft January GDP numbers, could help fuel expectations of another rate cut, given that Canadian inflation is below the central bank's 1%-3% target range. Last week's 25-basis-point rate cut really represented the completion of the unwinding of last summer's 100-basis-point rate hike.

The Canadian bond market has been attracting global flows, according to reports. The yield on Canada's 30-year benchmark stands at its lowest level since the end of January. A gain in the U.S. dollar back above C$1.5100 would call into question the near-term favorable outlook for the Canadian dollar. Meanwhile, the

Toronto Stock Exchange

index is returning to the highs last seen in early January. Given that dependence of the Canadian economy on its southern neighbor, global investors sometimes use the Canadian stock market at a proxy for the U.S. market. Nevertheless, overall, major Canadian indices continue to trail behind similar U.S. indices.

Lastly, note that the Mexican peso was pushed off its seven-month highs against the U.S. dollar yesterday.

Mexican interest rates are falling faster than expected and some worry that Mexican markets are getting overextended. The peso and the bolsa were among the top performers in the first quarter in dollar terms and profit-taking pressures are building.

Yesterday's auction produced the lowest yields in nearly eight months. The yield on the benchmark 28-day cetes (T-bills) fell 120 basis points to 20.47%. Expectations that inflation will fall further than previously anticipated are helping to drive down nominal interest rates, which in real terms remain high. The market needs additional confirmation that price pressures are receding to drive the yield on the 28-day cetes below 20%. Momentum indicators on the peso are warning of the risk of additional near-term corrective pressures.

Marc Chandler is an independent global markets strategist who writes daily for At the time of publication, he held no positions in the currencies or instruments discussed in this column, though positions may change at any time. While he cannot provide investment advice or recommendations, he invites you to comment on his column at

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