Citibank to the rescue?

With few data releases on tap today, developments in this field likely to be a major factor for direction

MAJOR HEADLINES – PREVIOUS SESSION

• Canada Jan CPI out at -0.3% m/m vs -0.2% expected

• US Jan CPI at +0.3%, Ex Food/Energy flat vs +0.3% and -0.1% expected resp.

• NZ Jan Credit Card Spending at -2.2% y/y vs revised -3.8% prior

• JP Jan Supermarket sales at -2.7% vs -2.8% prior

THEMES TO WATCH – UPCOMING SESSION

• ECB’s Trichet speaks in Paris (0800)

• Italy CPI (0900)

• Canada Retail Sales (1330)
  

• US Dallas Fed Manufacturing Activity (1530)

Market Comment:

After the squeeze on USD long positions on Friday during the New York session on concerns that BOA and Citibank would be nationalized at the weekend, Asia responded positively to early morning news that Citibank was in discussions with Fed officials that could result in the US taxpayer expanding its ownership of common stock in the bank to 40%, though bank executives said they hoped the stake would be closer to 25%. The market regarded a 40% stake as better than a fully-blown nationalization and began to embrace risk again during the morning, giving the greenback a further knock back from Friday’s closing levels. Meanwhile, BOA commented that it was not in discussions with the government to increase its stake while the White House reiterated that it was more in favour of a privately-held banking system.

The EUR has a bit of a wobble just before the Asian open after comments from German finance minister Peer Steinbruck highlighted that European finance ministers had discussed at their weekend meeting in Berlin the possibility that some countries, and “not just Eastern European states”, may experience troubles when refinancing their dept. Also at the meeting, called to prepare a common European stance ahead of the upcoming G20 meeting in London on April 2, European leaders agreed that all financial markets, products and participants needed to be more stringently regulated and any measures that might distort competition, including protectionism, must be avoided. The EUR’s early softness was compounded by comments from ECB member Orphanides who said the ECB was still studying various unconventional policy tactics but was in no rush to use or implement them as they still had the option of conventional policy actions in cutting rates.

While mentioning the ECB, Bini Smaghi commented that the creation of a “national” bad bank would not be a suitable solution unless the entire banking system had failed. However, the creation of “bad bank vehicles” by individual banks to ring-fence toxic assets and negate their effect on a bank’s operations would be more feasible. In this vein, UK press reported that RBS was considering just such a vehicle to house over GBP200 bln worth of toxic assets as the breakup of the RBS “empire” begins. Talk is that the bank is mulling exiting, or selling off part of its Australia division, and putting other assets in Asia, Central Europe and the US on the auction block. The bank is scheduled to release details of which businesses would be retained as it rebirths as a more UK-focused entity as part of the government’s terms to allow its entry into the toxic debt insurance scheme.

After the initial jolt from the Citibank news, with stops triggered across the board and risk appetite back in vogue, FX markets in Asia settled into range-bound activity and await further direction clues at the European open. The sharp moves seen both Friday and already today show how fragile sentiment and conviction are at the moment and looks like we are headed to to volatile kick-off. With very little on the data tap at the start of the week, focus will remain squarely in the financial sectors across the globe with developments in the degree of nationalization a headline grabber. Expectations the US Treasury Secretary Geithner will disclose further (or indeed the first!) concrete ideas about the content and working of the US bank bailout plan early in the week may help risk appetite to enjoy a resurgence, but markets will be wary that this could prove to be tentative and temporary. Data releases today centre around Italian CPI, Canada Retail Sales and US Dallas Fed Manufacturing Activity. watch for comments from ECB's Trichet who is speaking at a Securities Regulator's Forum in Paris.

Note: the support/resistance levels used in the matrix’s of this document are levels derived from yesterday high, low and close. Reference in the text to other support/resistance levels will occur.