Dollar charge pauses as bond bashing relents

[November 17, 2016]  By Marc Jones

LONDON (Reuters) - Battered bonds and emerging market currencies enjoyed some respite on Thursday as the dollar took a breather from a post-U.S. election charge that has taken it to a 13-1/2 year high.

Wall Street looked set for a quiet start and Europe's main stock markets <0#.INDEXE> were shuffling sideways as the dip in global bond yields cooled bank stocks, which have been rising on better lending profits. [.EU]

The dollar's drop against other top world currencies was a modest 0.3 percent <.DXY> but marked a change of direction after eight days of back-to-back gains that have seen it jump almost 4 percent. [/FRX]

"The momentum of the Trump rally (in bond yields and the dollar) has faded a bit so we are all trying to recover," said Rabobank strategist Philip Marey.

He said investors were trying to get a handle on what U.S. President-elect Donald Trump is likely to do when he takes office in January, as well as position for what now looks almost certain to be a U.S. interest rate rise next month.

"Today the interesting things are a speech from (Fed chair) Janet Yellen and whether there is anything new there. There's also (U.S.) inflation data so, if they don't have any negative surprises, we are heading for a rate hike."

JAPANESE YIELD CAP

For bond markets, which have taken the brunt of the Trump trade, the most significant event overnight was the Bank of Japan’s attempt to cap 10-year Japanese government bond yields and make good its recent promise to keep them pinned at zero.

That had pushed the yen as low as 109.30 yen per dollar <JPY=> and the Japanese currency was barely budging at 109.00 as the first flurries of U.S. trading began. [FRX/]

More broadly, Japan's efforts will raise questions about how far central banks such as the ECB and others will be willing to tolerate steep and sudden rises in government borrowing costs.

The ECB published the minutes of its recent meeting showing Mario Draghi and his colleagues planning to detail the next steps for their mass stimulus program next month.

Even as it was confirmed that inflation in the euro zone had nudged up last month, ECB policymaker Yves Mersch said in Frankfurt: "I believe that (talking about exiting stimulus) is probably still premature, given the fragility of the European growth path."

The euro <EUR=> added 0.4 percent from Wednesday to stand at $1.0730 after setting an 11-month low of $1.0666 overnight.

Germany's benchmark 10-year Bund yield fell almost 5 basis points to 0.26 percent, moving away from a peak of 0.396 percent hit on Monday -- the highest level since late January. Other euro zone yields were 2-5 bps lower on the day.

People walk past an electronic board showing Japan's Nikkei average outside a brokerage in Tokyo, Japan, November 16, 2016. REUTERS/Toru Hanai

"The BOJ's move shows that there is a bit more of an effort to cap yields and, knowing that, other bond markets can be more stable from here," said Mizuho strategist Peter Chatwell.

MEXICO HIKE

The rout in U.S. bond prices also halted, with Treasury yields <US10YT=RR> pulling back to 2.2 percent after touching an 11-month high above 2.3 percent earlier in the week.

Crude oil prices began to climb again, though, as Saudi Energy Minister Khalid al-Falih said he was optimistic that OPEC would formalize a preliminary output freeze deal reached in Algeria back in September. [O/R]

Brent crude jumped 80 cents to 47.40 a barrel  and U.S. light crude was up 75 cents at $46.32.

Gold nudged up slightly as the dollar consolidated. Spot gold  inched up 0.2 percent to $1,228 an ounce, moving further away from the five-month low of $1,211.08 set on Monday.

Gold had still lost roughly $100 an ounce from last Wednesday's post-U.S. election high on the back of the sharp rise in bond yields and burgeoning appetite for risk. [GOL/]

Emerging markets, also battered by the jump in the dollar and borrowing costs and the prospect of a major shake-up in trade deals under Donald Trump, remained on edge.

The Malaysian ringgit hit a 10-month low on increasing fears that authorities could introduce capital controls, while Mexico's peso inched away from recent all-time lows ahead of what was expected to be an interest rate hike later.

"The central bank needs to send a strong message," said Carlos Serrano, an economist at BBVA Bancomer, who was expecting a 75-basis-point hike.

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