Rating Agencies are Over-rated, China could Re-value this Weekend

The stability of the EURO zone is at stake if a 45b EUR loan package for Greece can’t be delivered quickly. Them are Merkel’s words, but, is it enough as we witness record divesting of contagion tainted Euro bond holdings? The estimation of a 120b Euro price tag (three times more than originally anticipated) continues to burden the EUR. There is speculation that Germany and the other prosperous members will have to shoulder most of the burden of a bailout. The realization that a few ‘have’s’ have to support the potential expanding ‘have not’s’ could eventually underpin the overall structure of the EU. The fear of political fallout has investors continuing to divest their European holdings on any asset class rallies at the moment. The unknown has short traders not necessarily adding to their positions but has them sitting comfortable as we again encroach on that psychological 1.300 level. Perhaps we should be buying into the German finance minister Schaeuble comments that ‘market players should not take rating agencies too seriously’.

The US$ is mixed in the O/N trading session. Currently it is higher against 8 of the 16 most actively traded currencies in a ‘subdued’ trading range.

No surprises yesterday with the Fed pledging its intention to keep short term lending interest rate near zero for an ‘extended period’ and at the same time acknowledged that the labor market is ‘beginning to improve’. It remains a necessity as ‘helicopter’ Ben contends with an economy that’s been growing without an increase in underlying inflation or a decline in the unemployment rate (+9.7%). On the face of it, consumer spending is recovering along with business investment, but credit to households remains tight. ‘With substantial resource slack continuing to restrain cost pressures and longer term inflation expectations stable, inflation is likely to be subdued for some time’ according to the minutes.

Escaping Europe and focusing on China for a moment. Some analysts believe that China is on the verge of revaluing their currency as early as tomorrow.

• The G20 last week did not pressure them, thus saving face and giving the Chinese autonomy to revalue on their ‘time scale’.
• It’s a long-weekend in China. The norm of late has been to announce policies before a long weekend.
• The Shanghai Expo is a prestigious event in China. This would give the media an excuse to focus on the cultural event rather on the policy decision, some would say ‘saving face for the authorities’.
• Finally, China is scheduled to have dialogues with the US by the end of May. This is an opportune time to get the ‘reval or reform’ issue out of the way.

Maybe none of these reasons are valid, but, after this week it would be throwing an interesting ingredient into the mix.

The USD$ is lower against the EUR +0.06%, GBP +0.02%, CHF +0.01% and JPY +0.07%. The commodity currencies are stronger this morning, CAD +0.02% and AUD +0.11%. The Canadian dollar continues to price in an earlier interest rate hike by the BOC over its southern neighbor the FED. Yesterday, the loonie temporarily advanced vs. the greenback for the first time in three days as investors sought the currencies of countries that had stronger balance sheets. The belief that European official will speed up the financial aid process for Greece had speculators again looking to invest in growth commodity currencies. Canadian fundamentals, similar to Australia have been hitting it out of the park when compared to other economies. Unlike the RBA, the BOC seems to be behind the blackball when it comes to their lending rate adjustments. Already this month we have witnessed Governor Carney and co. underestimating their prediction for Canadian economic growth and dropping their pledge to holding it there through June. He reiterated to a House of Commons committee this week that it’s ‘appropriate to begin to lessen the degree of monetary stimuli’. The Canadian Finance Minister’s comment that the loonie appreciation to parity has been orderly shows that the Harper government is comfortable with the currency’s value. Canada seems to have adjusted appropriately to these levels after its two-year hiatus from last achieving parity. USD rallies remain shallow and are met with strong resistance.

Last night, the NZD fell against all its major trading partners after the RBNZ Governor Bollard stated that they may be entering a position to hike interest rates at a slower pace than in previous cycles. This caused the Kiwi to drop from its 3-month highs in the O/N session vs. the JPY as the global outlook risks remain ‘elevated’. Regional demand for both the Kiwi and Aussi is somewhat curtailed by the ‘daily’ routine cut by S&P’s of another European Credit entity. Bollard stated that ‘they expect to begin removing policy stimulus over the coming months, provided the economy continues to evolve as projected’. The economic recovery will be ‘in line with or slightly faster than our March projection’. The NZD has risen +0.9% this month vs. the greenback (the best performer amongst the 10 majors) on speculation Bollard will begin raising rates as the economy recovers. On the other hand, the AUD remains buoyant vs. the Kiwi as economists expect the RBA to hike the key interest rate to +4.5% next month.

Crude is higher in the O/N session ($83.75 up +53c). Crude prices were little changed yesterday despite the weekly EIA report showing another increase in headline inventories. Oil stocks rose +1.9m barrels last week, more than double expected (+0.9m). That puts total crude and refined products at their highest level in 4-months. They have grown in five of the last six weeks. All this is occurring despite refineries increasing their operating levels (+89% vs. +85.9%) w/w. It’s worth noting, that in total, refiners have dragged their utilization rate higher by +6.4% in the last month alone, and all the while not knowing how much fuel demand will rise in the next few months. Digging deeper into the report, distillate inventories (heating oil and diesel) rose by +2.9m barrels vs. an expected build of + 1.2m. In contrast, gas stockpiles fell -1.2m barrels, compared with expectations for a gain of +600k. Analysts remain concerned that the European contagion issues will dominate risk aversion, making the $80 floor ripe to be threatened in the medium term. Analysts also note that crude oil volatility has fallen to its lowest level in almost 3-years on the back of rising stockpiles and OPEC’s ‘investment in production capacity easing concerns of shortages’. Normally with a headline report like this would immediately provide a bearish selling mentality, however, lack of volatility has ‘temporarily’ dampened any selling enthusiasm. Expect better selling on rallies.

Another 4-month high was printed by the ‘yellow metal’ yesterday on signs of increased demand for the precious metal as an alternative to holding currencies. With Standard & Poor’s lowering the credit ratings of Greece, Portugal and Spain (thus far) this week is causing concerns that a European’s sovereign-debt crisis will threaten a global economic recovery. Why would a debt crisis just stop in Europe? There’s Japan and the US to also consider. Frightened Capital is seeking a safer heaven as European confusion continues. Various technical analysts believe that $1,300 is a possible one-year target with consumer support. Downgrades and fear of defaults will continue to have investors seeking an alternative to an ‘on going weakening’ of the EUR and low interest rates ($1,171).

The Nikkei closed at 10,924 down -287. The DAX index in Europe was at 6,096 up +13; the FTSE (UK) currently is 5,610 +24. The early call for the open of key US indices is higher. The US 10-year backed up 6bp yesterday (3.76%) and is little changed in the O/N session. Treasury prices have found some traction after the US yield curve drifted higher as traders took down supply. The continued credit rating concerns plaguing various EU members has longer term investors seeking some ‘surety’. With the FED remaining on hold, global investors continue to fret about the ‘junk contagion issues’ sweeping Europe. Today US dealers get to take down the final record breaking auction of this week ($129b). The ‘flight to quality’ underpinning from Greece is expected to contain any backup in rates as ‘the broader uncertainty has yet to be resolved’.

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