MAJOR HEADLINES – PREVIOUS SESSION

  • New Zealand Q4 Current Account Balance out at -4.026B vs. -4.0B expected
  • Japan Feb. Corporate Service Prices fell -2.6% YoY vs. -2.5% expected
  • Germany April GfK Consumer Confidence out at 2.4 vs. 2.5 expected and 2.5 in Mar.
  • Sweden Feb. Household Lending out at +8.6% YoY vs. 8.6% in Jan.
  • UK Feb. Retail Sales out at -1.9% MoM vs. -0.4% expected

THEMES TO WATCH – UPCOMING SESSION

  • US Q4 Final GDP revision (1230)
  • US Weekly Initial Jobless Claims out at k vs. 650k expected and 646k the previous week (1230)
  • US Treasury Secretary Geithner to Testify on Financial Regulation (1400)
  • US Fed's Fisher to Speak (1600)
  • US Fed's Lacker to Speak (1630)
  • US Fed's Stern to Speak (1700)
  • New Zealand Q4 GDP (2145)
  • New Zealand Feb. Trade Balance (2145)
  • Japan Mar. Tokyo CPI and Feb. National CPI (2330)
  • Japan Feb. Large Retailers' Sales and Retail Trade (2350)

Market Comment:

GBP is off to another weak day on signs that consumption activity dropped precipitously in February after a much stronger than expected January reading. This and yesterday's failed Gilt auction really have GBP on the ropes again, despite the general risk willingness elsewhere and a weak JPY, which in the past has often been an aid to the pound. The recent Gilt auction's failure is an alarming sign for the pound, and attention now turns to the very large auction of US 7-year notes today after yesterday saw a 5-year auction that resulted in a higher than expected yield (one must note that the US 5-year auction saw a 2.02 to 1 bid to cover ratio compared with the Gilt auction's 0.93 to 1). It appears that both the BoE and the Fed are having a tough time generating interest in their product. Looking at the yield curve's reaction lately after debt monetization measures have been announced, it seems clear that investors feel shakier investing in duration: perhaps as they fear that the QE policies are eventually inflationary and only feel safe operating at the shorter end of the curve (this would explain the very robust demand for 2-year notes earlier this week relative to the failed auction of 40-year Gilts). Evidence suggests that China has stopped buying long treasuries and is rotating into shorter duration instruments only. In any case, this is a record week for Treasury issuance, and we should watch the results carefully for USD implications.

Yesterday saw a brief, if massive bout of volatility on remarks by Geithner in response to the Chinese central banker Zhou's idea of a super-currency to replace the USD as the world's reserve currency. The volatility was highly aggravated by a poorly-worded initial wire report from a wire agency. Geithner only actually stated that he supported the idea of the IMF issuing special drawing rights (SDR's). Later he was asked to clarify his comments and he simply stated that the dollar remains the world's dominant reserve currency and even followed up with the laughable standard phrase from previous secretaries that a strong dollar is in America's interest.

The idea of a super currency is interesting and plausible for the very long term, but nothing will save China's existing investment in US assets if it really wants to get rid of them and due to its important position in the world economy, it would also have to make the Yuan fully convertible for such a currency to function properly. It is clear going into the G20 meeting, that the IMF is seen as a coordinating body for worldwide bailout efforts and it will need some kind of SDR pledges to expand its activity as its reserves are very constrained already. The problem is - what backs the SDR's? As a background note, the presentation of this super-currency idea, which would take a massive, coordinated and sustained effort to carry out, shows how the balance of power is shifting to China and shows the mounting pressure on the US over its fiscal profligacy. The Fed will have a very tough time controlling the long end of the yield curve.

The Norwegian Krone weakened sharply yesterday as the Norges Bank slashed its forecasts for growth, inflation and deposit rates. It was obvious that the previous growth estimates would not hold, but the reductions were large and especially the projection that deposit rates could sink to 1% in the coming year remind the market that the Central Bank can cut much further and that long NOK is more of a safety trade than a carry trade. As the EURNOK rally was launched right near the critical 200-day moving average and a neckline area on the chart (8.60), we now have an important line in the sand. Our suspicion is the NOK has become the new JPY or CHF and will only really start to outperform if risk appetite nosedives once again, something we expect further out. Look for good levels to go long NOK in the coming couple of weeks as a short squeeze on EURNOK positions may be on here.

Looking at the US data yesterday, are we the only ones noticing the trend to improved data? The market seems to be ignoring this. The Durable Goods Orders and New Home Sales numbers yesterday were the latest to show an upside surprise. It appears that the number's downward trajectory may have exhausted itself for a while and we could be looking at some temporary stabilization in the economy - certainly at least a deceleration of the worsening.

Chart: EURUSD

The market remains rather rangebound here with EURUSD going into its fifth day of range trading since peaking out above 1.3700. Our general rule of thumb is that four days of range trading will kill the momentum of the previous impulse and heighten the unpredictability of the environment and raise the odds that a reversal could occur. Yesterday saw a bullish reversal from an attempt below the lower end of the range and sets up the 1.3450 area as the key trigger for bears. To the upside, we look at the recent 1.3737 high and the rapidly falling 200-day moving averages as the key resistance levels for this move.

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