Tuesday, March 2, 2010

The money market response to an upbeat policy statement out of the mouth of the Bank of Canada was pretty bearish with bills of acceptance slumping by one-eight of a percentage point. Dealers took the view that the Bank is indeed likely at some point in 2010 to start raising interest rates. The Canadian currency jumped in response to a perceived growing yield cushion against the dollar with local exporters far more likely to benefit from what the Bank of Canada referred to as strong domestic demand in many emerging market economies.


Canada's 90-day BA's - December bills dropped 11 basis points to 98.69 to imply a year end three-month cash yield of 1.31%. The benchmark short cash rate was left untouched at 0.25% but the upbeat statement from the BoC left dealers in the frame of mind that tightening will happen as the recovery continues. Bond yields actually dipped one basis point to 3.39% possibly on account of the note from the Bank that a rising dollar has the persistent impact of constraining inflationary pressures. The bottom line is that prevailing stronger economic activity and prospects are tipping the market towards an expectation of tighter monetary policy.


Eurodollar futures - June bonds became the lead month today as we approach delivery of March notes. The contract is trading either side of unchanged as investors see a relatively muted inflationary profile with a need to keep an ongoing watch on the situation in Europe. Eurodollar futures are not paying much attention to the overnight comments from Philadelphia Fed President Charles Plosser who said he'd rather the fOMC ditch its extended period terminology. The words gave a caffeine boost to the dollar earlier but as a non-voting member at the Fed, we know his hawkish words are not shared by more important voting members on the basis of recent speeches.

European short futures - Euribor futures are unchanged across the strip. On Thursday the ECB gets to air its latest views on whatever subject it chooses to. Factors important today are the state of play in EU negotiations with Greece over budgetary controls as well as the roadblocks the furor raises as the ECB attempts to step back from its emergency exit strategy.

March bunds are 10 ticks lower at 124.23 where the yield is 3.12%.Greek Prime Minister George Papandreou is scheduled to meet the German Chancellor Angela Merkel on Friday. It's still unclear whether we will ever hear of an emergency fund or plan to support Greece even in the event that it takes each and every measure suggested by the EU Monetary Commissioner Ollie Rehn who flew to Athens at the weekend.

British interest rate futures - A good auction of gilts has the bond bulls out in force buying government debt today. The June gilt future rallied sharply after the auction to yield 4.03% with the future adding 52 ticks on the day to 114.55. Short sterling has precious little to react to and is unchanged across the curve.

Australian rate futures -The RBA indeed raised its short rate to 4% and said that average borrowing costs still remained historically low. Inflation is now likely to be consistent with its official target, although that doesn't mean that risks are balanced, that would be a signal that rates are on hold. Given that the market is still looking for a further 1% as the economy simmers, 90-day bill futures continued to fall by about three basis points. The March 2011 maturity settled unchanged at 94.77 to imply a yield of 5.23% before the time the RBA has finished tightening. The 10-year government bond shed five basis points to 5.28% as the yield curve flattened. In a sign of robust demand for its resource exports the Australian Bureau of Agricultural and Resource Economics today forecast demand would grow by 15%to A$187 billion in the 12 months ending June 2011. The record of A$197 billion was set in the 2008/9 period also ending in June.

Japan - Yields fell one basis point at the 10-year where they stand at 1.28% and on the threshold of the lowest in many weeks. With Asian stocks remaining firm for two days in a row, it's strange to see bonds and stocks rise together.

Andrew Wilkinson

Senior Market Analyst