G7 Summit: Japan's Abe warns of another Lehman-strength crisis

Good morning,

- A vote to leave the European Union would threaten sterling’s elite status as an international reserve currency, Standard & Poor’s has warned. The credit ratings agency has claimed that withdrawing from the EU could “jeopardize the British pound sterling’s position”, as well as the associated benefits to the UK’s triple A credit rating. As such, a Brexit might lead the UK to lose its place alongside the US, eurozone, Japan and China in the reserve currency club. Frank Gill, an S&P analyst, said that a vote to leave the EU on June 23 could deter “foreign investment and other capital inflows into the UK”.

- ….Dallas Federal Reserve Bank President Robert Kaplan on Wednesday said he would support raising interest rates in the "near future," though a vote by Britain on whether to leave the European Union will weigh on any Fed rate decision in June. "If economic data keeps going the way it is, I've said I will advocate for an increase in the near future," Kaplan told reporters after a speech. "That may not be June or July; my approach is take one meeting at a time.

- Best/worst performers - Majors vs USD today: JPY: 0.4% CAD: 0.3% EUR: 0.3% AUD: 0.2% GBP: 0.1% NZD: -0.2%.

- Best/worst performers - Indices today: SUI20: 0.0% UK100: 0.0% AUS200: -0.3% JPN225: -0.7%.

- Moody's report says Chinese authorities have the ability to mitigate the risk of financial crisis.

- $NZD declined across the board as Fonterra forecasted 2016/17 milk prices at NZ$4.25, short of the NZ$4.60-4.80 estimated by economists.

- Announced an opening forecast farmgate milk price of $4.25 per kgms for the 2016/17 season • Say "conditions on farm are very challenging" • Says "we are expecting global dairy pricing to gradually improve over the season " • "New Zealand dollar is relatively high and is currently impacting milk prices and our forecasts" More: • Long term fundamentals for global dairy remain positive with demand expected to increase by two to three per cent a year • There is no change to the current 2015/16 season forecast farmgate milk price, which is being held at $3.90 per kgms ……’kiwi’ is expected to be under pressure for a long time…sounds a good idea to short the New Zealand Dollar.

- Some ideas (UOB):

EUR/USD: Bearish: To take partial profit at 1.1055. There is not much to add; we still believe the current EUR weakness has scope to extend lower to mid-March low of 1.1055. This is a rather strong support and those who are short from last Monday should look to cover half of their position at this level.

GBP/USD: Shift from neutral to bullish: Anticipating a break above 1.4770. The ease of which last week’s 1.4663 top is taken out coupled with the strong daily closing has shifted the outlook to bullish again. From here, we are targeting a break above the month’s high of 1.4770. The next resistance above this level is closer to 1.4890. Stop-loss is at 1.4550 even though 1.4625 is already a strong support.

AUD/USD: Neutral: In a lower range of 0.7150/0.7350. [No change in view] While the undertone for AUD is weak, lackluster momentum indicators continue to suggest that the current weakness is unlikely to be sustained. Overall, we prefer to hold a neutral view for now and would reassess our view if there is clear move beyond the current expected 0.7150/0.7350 range.

NZD/USD: Neutral: Increasing downward pressure. While the outlook for NZD is still deemed as neutral for now, downward pressure is increasing and a clear break below would indicate the start of a sustained down-move to 0.6670. Overall, this pair is expected to remain under pressure in the next few days unless it can reclaim 0.6775/80.

USD/JPY: Neutral: Bullish only if above 110.60. There is no change to the current neutral outlook for USD. Last week 110.55/60 peak is likely a short-term top but momentum indicators do not suggest that a sustained period of USD weakness is imminent. Support is at 109.00 followed by 108.40.

- China's leaders continue to worry about the country's economy. The rest of the world should too. On Wednesday, China's central bank weakened the yuan to its lowest level in five years. The actual cut was small: only about 0.3%. It didn't send world markets into a downward spiral like in August, when China devalued its currency by nearly 2%, or in early January, when it cut by about 0.5%. Nevertheless, it's a warning sign. "Whether China stress reemerges is a key unknown," wrote the economics team at Deutsche Bank Research Wednesday.

- Major news for today: USD Core Durable Goods, USD Unemployment Claims, GBP Second Estimate q/q, G7 meetings.