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Encouraged that major central banks and global leaders are gradually cranking up the policy levers, yesterday witnessed the return of a more positive tone to risk assets. This appeared to weigh on the dollar somewhat, which lost ground against most other major currencies. The euro, which wobbled earlier in the day, is back near 1.23, a level it has really struggled to penetrate over the past two weeks despite frequent attempts.

Critical in the near term is the vote of the German parliament on whether to allow Europe’s bailout funds to lend directly to Spanish lenders. More impressive has been the Aussie dollar, which is now perched just shy of the 1.04 level, an 11-week high. Just a week ago it was languishing around the 1.01 level and a test of parity loomed large. Much to the chagrin of Tokyo, the Japanese yen has advanced further, with USD/JPY now near 78.50, a six-week low.

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The pound retains a bid tone, yesterday’s news on the jobs market again surprisingly upbeat. At 78.50 against the euro, the pound still appears poised for further gains. Overnight, Asian markets affirmed yesterday’s optimism, with the ASX 200 up 2% and the Hang Seng 1.6% higher. Looking ahead, today’s US initial claims data will be closely watched, after a surprise dip last week. Recall that in terms of future monetary policy moves, the Fed is especially attuned to labour market news at present.

Commentary

Greece’s creaky coalition agrees on more cuts. It appears that the new coalition in Greece ‘might’ be making some progress, much to the surprise of many. Yesterday there was an announcement out of Athens that the Samaras coalition was discussing some EUR 11.5bn of additional savings in order to placate international creditors. Finance Minister Stournaras made the telling observation that Greece spends some 25% of GDP on social benefits and entitlements but one fifth of the population live in poverty. The new government needs to convince the troika of its fiscal bona-fides in order to obtain release of the latest tranche of bailout cash (worth EUR 4.2bn), which was due to be paid out in June but was suspended because of the political uncertainty. According to Bloomberg, the ECB owns two Greek bonds worth EUR 3.1bn which need to be repaid in a month’s time. Almost unnoticed, long-dated Greek bond yields have fallen by more than 200bp over the past six weeks.

Japan’s looming membership of the NIR club. Before too much longer, it might be the case that short-term interest rates in Japan will turn negative. Yesterday, the BoJ announced that it was discontinuing the 0.1% floor on any purchases of government bonds (of less than one year) that it makes in the secondary market. This action allows for the possibility that the BoJ may end up buying government paper at negative yields before too long. The BoJ has had considerable difficulty over recent months conducting these rinban operations, consistently failing to attract sufficient bids. In Germany, the Netherlands, Denmark, Switzerland and Belgium, investors are now happy to pay governments for the privilege of looking after their money. Japan may well join this group in coming months.