German IFO drops to new low. JPY crosses finally find some resistance.
MAJOR HEADLINES – PREVIOUS SESSION
- Japan Feb. Adjusted Merchandise Trade Balance out at -¥43.3B vs. -¥297.8B expected
- Japan Feb. Merchandise Trade Exports fell -49.4% vs. -47.6% exp. and Imports fell -43% vs. -38.4% expected
- New Zealand Q1 Consumer Confidence fell to 96.0 vs. 101.3 in Q4
- Sweden Feb. Trade Balance out at +9.5B vs. 8.5B expected
- Germany Mar. IFO out at 82.1 vs. 82.2 expected and 82.6 in Feb.
- UK Mar. CBI Distributive Trade Reported Sales fell to -44 from -25 in Feb.
- US Feb. Durable Goods Orders rose 3.4% vs. -2.5% expected and +3.9% ex Transportation vs. -2.0% expected (previous month's data revised down -2.1%/-3.4% respectively, however)
- Norway Norges Bank cut rates 50 bps to bring the rate to 2.00% as expected
THEMES TO WATCH – UPCOMING SESSION
- US Feb. New Home Sales (1400)
- US Fed's Duke to Testify (1400)
- US Weekly Crude Oil and Product Inventories (1430)
- US Fed's Pianalto to Speak (1620)
- US Fed's Yellen to Speak (1700)
- New Zealand Q4 Current Account Balance (2145)
- Japan Feb. Corporate Service Prices (2350)
- Australia RBA to release Financial Stability Review (0030)
Market Comment:
An auction of 40-year UK gilts today failed, with a bid-to-cover of only 0.93. This auction shows that despite the BoE's outright purchases of gilts, market participants are obviously worried about the longer term fiscal effects of QE and its implications for the interest rates and the value of sterling much further down the road. The news sent the pound tumbling across the board, and the fact that the JPY has put up some resistance was no help, as the GBP seems to trade like the "anti-yen" of late. Thus we have GBP caught in the crossfire between the two themes of competitive devaluation (GBP negative) and the hope that the PPIP program and other measures will help to relieve some of the pressures on banks (GBP positive). Any path toward more GBP strength will be a tough one.
After the initial warm reception of the PPIP plan, the commentators have been picking the plan apart, just as they have picked apart every other effort by the government to date. We find reason for some measure of hope, provided it is carried out properly and provided enough speculative money arrives on the scene to help price discovery. Simon Nixon at the Wall Street Journal makes a few excellent points on the potential positives and negatives. The best longer term potential positive is the idea that the PPIP could help reliquidify currently totally frozen markets. This would force banks to mark their assets to market rather than maintaining unrealistically high expectations and hopefully force the weakest banks to go belly up and a liquidation of their assets, a liquidation that could occur precisely because the plan is in place to help private capital purchase these assets. It is important in any case to force the weak banks to face the music rather than allowing the kind of zombie banks that Japan kept on life support in the 90's. Anything that eventually forces the banking system to take the pain and hand over assets to the clever and strong, thus subsidizing strength rather than weakness has to be a positive. The process will take some a considerable period of time, however, and will take several quarters to sort through at minimum.
Bernanke and Geithner were in the hot seat yesterday before a House panel that clearly had populist bones to pick. At the heart of the furor is of course the AIG derivative contracts that ended up meaning a transfer of tens of billions of dollars of public funds (after the AIG takeover) to other companies to make good on AIG's obligations. It is clear that the US lawmakers are moving toward new regulations that could mean the seizure of nonbank entities and cancellation or alteration of some contracts - especially CDS contracts, trillions of dollars of which were created in what amounted to the world's largest casino in history during the credit bubble and trillions of dollars of which are still causing potentially systemic pain. In addition to the CDS issues, we should expect the most significant overhaul of the financial market regulatory framework since the Roosevelt administration.
The March German IFO number was out showing another drop to a generational low as Germany has little to like about the current economic environment, especially considering the weakness in its export markets. Just look at the Japanese basket case, where exports have fallen almost by half in year-on-year comparisons. Commerzbank was out saying that it expects German GDP to fall by 6-7% this year. A number that is not especially shocking for an export economy in this global economic recession. Japan's rate of contraction, for example, was worse than 12% annualized in Q4. A strong Euro is doing no one any favors in the EuroZone either.
The end of today will mark a full week since last Wednesday's FOMC announcement of new and vastly expanded QE measures and as of this writing, EURUSD is virtually unchanged from that day's close. In other words, the USD took a very large upfront, but now the market seems uncertain whether it wants to drive the USD weaker here. On the one hand, the QE measures are clearly a longer term USD negative, but on the other hand, some of the US numbers are showing signs of resilience, at least in the consumption category, and it is hard to take a shine to any other currency at the moment. As well, the QE measures and debt monetization have failed to budge the US T-bond yield after the initial kneejerk reaction. We watch the 200-day moving average in EURUSD (currently around 1.3870) as probably providing stiff resistance for now.
As we are going to press, Norges Bank was out announcing the expected 50-bp cut to Deposit rates, thereby bringing the rate to 2.00%. This move came as EURNOK was trading at a neckline-like area around 8.60. The initial reaction was a sharp weakening to the Krone as the bank was also out showing much lower target forecasts for its deposit rates in the coming years. It looks like we have a squeeze on in NOK longs, but we are still NOK bulls for the medium term.
Chart: EURJPY
The persistent EURJPY rally of late finally met resistance late yesterday as equities eased off recent highs. We wonder if the JPY crosses will top out here towards the end of March as Japan gets set for a new financial year. Watch the 200-day moving average in this cross as an important technical level over the coming week.
