Dollar Mixed while Equities Recover to Start Eventful Week
The US dollar is mixed against the major currencies, and while it is firmer against the euro and yen, it is within last week's ranges. The success of Macron's new party in France, and the majority is secured, was well anticipated by investors and is having little effect on today's activity in the capital markets.
The start of Brexit talks also is spurring little response in the market. Sterling is steady to a little firmer and holding below last week's high just shy of $1.2820, though a more important barrier is seen near $1.2850, where the 20-day moving average and a retracement objective converge. Steps were taken by the government, like going forward with Queen's Speech, even though an agreement with the DUP is not secure, and indicated a two-year parliamentary session suggest that the election has not changed the main thrust of the Brexit strategy. Talk of a more business approach flies in the face of the continued commitment to leave the single market. Meanwhile, some polls over the weekend suggest that many people's attitude toward Brexit has changed.
The market has also shrugged off weekend developments in Italy, where it appears that the two troubled regional Italian banks will not get a precautionary line of credit that seemed like the most likely scenario late last week. It is not clear exactly what is going to happen, but the fallback strategy under the Bank Recovery and Resolution Directive (BRRD) may be to establish a good and bad bank, and this could, in theory, avoid "bailing in" depositors and subordinated creditors, as equity investors have already been wiped out. Italian bank shares fell in the second half of last week but are steady to a little higher now. The sovereign five-year CDS is also little changed. Italy's 10-year bond yield has dropped four basis points, which is among the biggest moves today, while the two-year yield is little changed.