USD still under pressure as the long weekend approaches; Time for some profit-taking?


MAJOR HEADLINES – PREVIOUS SESSION

  • US Weekly Jobless Claims out at 631k vs. 625k expected and 637k prior

  • US Apr. Leading Indicators out at +1.0% vs. +0.8% expected and revised -0.2% prior

  •  US May Philadelphia Fed Index out at -22.6 vs. -18.0 expected and -24.4 prior

  • JP Apr. Supermarket Sales out at -3.7% vs. -4.0% prior

  • JP Mar. Leading Indicators out at 76.3 vs. 76.6 prior

  • JP Mar. Coincident Indicators out at 85.1 vs. 84.9 prior

  • JP BOJ leaves rates unchanged at 0.1%, upgrades view on economy


THEMES TO WATCH – UPCOMING SESSION

  • Swiss M3 Money Supply (0700)

  • UK Q1 GDP (0830)

  • UK Private Consumption (0830)

  • UK Government Spending (0830)

  •  UK Exports/Imports (0830)

  • UK Index of Services (0830)

  • CA Retail Sales (1230)

  • US Fed’s Bernanke speaks (1800)

Market Comment:

Sovereign ratings provided the vast majority of the input into market moves yesterday. First off, S&P downgraded the outlook for the UK’s debt to negative from stable as fears grow over the ballooning debt burden. GBP’s kneejerk reaction lower proved short-lived as both Fitch and Moody’s affirmed their AAA rating and the UK gilt auction saw a solid response and demand.

Subsequently thoughts turned to the US and its (precarious?) AAA debt rating.
Moody’s came out and said they were comfortable with the US’ AAA rating for now, but cautioned that this was “not guaranteed forever” and said it was clear that there were long-term pressures on the rating. PIMCO’s Bill Gross also cast a shadow over the US’ rating, saying the US risked losing its coveted AAA rating in 3-4 years but thought that markets would recognize the problems before the ratings agencies.

Following the US rating rumbles the greenback took a heavy hit, with the USD index slumping to levels not seen since December 2008. For the third straight session the correlation between the USD and risk appetite appeared to break down. A sell-off in equity markets across the globe could not benefit the dollar, and we could be seeing the beginnings of sustained USD weakness, even possibly a USD crisis, if the trait carries on. Furthermore, the meltdown in US bond markets last nights, and the implied higher yields as a result was not a magnet for USD flows.

China’s recent efforts to knock the USD off its global perch, (certainly succeeding in knocking it back in value) prompted an article in the FT today which doubts that any changes will be quick. It highlights that the dollar’s position as the reserve currency was the result of powerful economic realities and not the decision of a room full of bureaucrats. Nevertheless, it acknowledges that China is putting down some important and relevant long-term markers.

Fed speakers Rosengren and Plosser overnight saw conflicting ideas. Plosser, Philadelphia Fed chief, cautioned that the Fed should not get over-complacent with inflation and admitted that he saw less deflationary potential, greater inflation risk than other forecasters. One person on the other side of the fence was Rosengren, the Boston Fed president, who said he was more concerned about deflation over inflation and would only worry about inflation when the economy improves. On this topic, he expects to see positive US growth by year-end but the recovery would be slow. Plosser warned that the Fed’s emergency measures may put its independence at risk and warned that the Fed should not mix monetary and fiscal policies, adding that some aspects of the current debacle were “eerily reminiscent” of the 1970s with rapid monetary expansion in the face of an apparent output gap.

The BOJ kept rates unchanged at its rate review today, a result that was widely anticipated (where can they go?). The accompanying statements were mildly more upbeat than in the past (in fact the first time since July 2006) expecting the economy to stop deteriorating and exports, output to start recovering. The BOJ also announced that it would accept some foreign bonds as collateral - US, German and French debt and, more notably after yesterday’s outlook downgrade, the UK.