The USD/JPY reversed earlier gains as it looks to continue the current bullish trend. Last week we pointed out a divergence between the pair and equity markets as an opportunity. We finally saw the expected yen weakness as the pair caught up with rising equity markets soaring over 200 pips. Dollar/yen has seen its correlation with risk jump to 48% from 34% a month ago as the pair continues to see its traditional relationship re-established. U.S. interest rate expectations have dimmed from a month ago when we saw the Fed raise the discount rate which has also seen its influence on price action diminish.
The difficulties facing the smaller economies in the European Union have made daily headlines for months now. Within the past year, several EU-member nations have been on the wrong end of a credit ratings downgrade, and given current conditions, the likelihood of further cuts grows with each passing day.
It has been just over a year since Spain saw Standard & Poors reduce its credit rating from AAA to AA+. S&P also trimmed Portugal’s credit worthiness rating from AA+ to AA-. Despite these moves, it appears that Greece remains the weakest link in an already flimsy chain as S&P downgraded Greece’s rating to BBB+ this past December. This is the lowest of the “Investment Grade” ratings, but the reality is that, for a sovereign nation, this is really the equivalent of “junk” status. Worse still, S&P has warned that given the downside risks of dealing with Greece, further cuts are not out of the question.
“If public support for the government’s stability program decreases from its current level, compromising its execution, we could also lower the rating,” noted S&P analyst Marko Mrsnik in a statement released February 24th.
Seeing that – even as I write this – Greece is in a state of lock-down, I would guess that “public support” is a bit on the light side. Schools are shuttered, the airports are offline, and public transit is shut tight as protestors take to the streets in the thousands. All this in reaction to the government’s first attempts at reigning-in spending, which so far, have consisted of a lot of talk, but little action. Imagine the outcry when the austerity program actually kicks in.
In addition to dramatic spending cuts, Greece must raise in the order of $54 billion this year to cover its budget shortfall. At its bond sale last week, Greece was forced to increase the yield on its 10-year bonds to attract sufficient buyers to ensure a successful sale. The yield spread, when compared to Germany’s equivalent bond, jumped 11 points over the previous sale to 297 basis points. Demand was strong, but it is clear that investors see this as an opportunity to buy high-yielding bonds, ultimately, backed by the collective strength of the entire EU. Buyers are clearly betting on a rescue package should Greece be forced to default.
BEIJING, March 12 (Reuters) - The United States should not make a political issue out of the yuan, a Chinese central banker said on Friday, as the two countries lurched towards a potential bust-up over Beijing's currency regime.The US will stop making a political issue out of it when China unleashes that puppy to run freely. How about that? So lets commend President Obama for calling out Chinas currency policy which could be dubbed politically dictated, at least.
The latest rhetorical salvoes underlined how long-running friction caused by the yuan's de facto dollar peg could come to a head next month when U.S. President Barack Obama's administration decides whether to brand China as a "currency manipulator".
People's Bank of China Vice Governor Su Ning said the United States should look to itself to boost exports and not cast blame on other countries, when asked to comment on remarks on Thursday by Obama, who called on China to move to a "more market-oriented exchange rate".
But then lets ask President Obama to further consider a good portion of his own policies and ideas ... and how well they line up with the free market process.
Either way, the US does need to worry about its own exports; we do need to get serious about maintaining a suitable environment in which our businesses can thrive. But it still isnt fun when, in this ever-integrated global economy, one major player isnt playing by the rules (this is not to presume anyone is perfect on this score, but any way you slice the numbers, the Chinese currency is significantly undervalued; this by no means any revaluation will be a magic elixir for Western trade; its never that easy, nor should it be).
Okay, heres another story making news ...
March 12 (Bloomberg) -- Federal Reserve Bank of San Francisco President Janet Yellen is President Barack Obamas pick for vice chairman of the central bank in Washington, two people with knowledge of the selection process said.Should this maneuver come as any surprise? No. Should the US dollar be immediately and substantially impacted by this news? Doubtful. Could the US dollar be impacted in the future by this move? Absolutely. Two words: interest rates.
The nomination is pending completion of vetting by the Obama administration, one person said. The vice chairman gets a four-year term, subject to Senate approval, and a separate term on the Fed Board of Governors. The people spoke on condition of anonymity because the selection hasnt yet been announced.
Yellen, 63, would replace Donald Kohn, a 40-year Fed veteran who resigned last week effective June 23. Yellen, who served as President Bill Clintons chief economist in the 1990s, said last month that the U.S. economy still needs the support of extraordinarily low interest rates. She would gain a permanent vote on monetary policy, instead of having a vote one year out of every three as a regional Fed chief.
As recently as February of this year Yellen apparently said, Even with my moderate growth forecast, the economy will be operating well below its potential for several years. If it were possible to take interest rates into negative territory I would be voting for that.
I hear, as congratulations to being appointed to this position, Bernanke is going to make her a copy of the keys to his helicopter. Where is China when you need them? I mean, cant some big thinker in the Far East tell us how we should be handling monetary policy too?
Are we still wondering if sub-par growth is due to a lack of sufficient money supply? Are we no longer wondering if ample liquidity bred excesses that helped exacerbate the credit crisis/recession? Hey, the folks over at Alcoholics Anonymous have done a good job recognizing their problems and changing their ways; what do you say we take them out for beers to celebrate?
And to round out this mornings discussion ...
WASHINGTON (AP) The government ran up the largest monthly deficit in history in February, keeping the flood of red ink on track to top last year's record for the full year.Ok, yeah, this isnt a surprise either. But for heavens sake it should be a surprise -- a brutally awful one. Otherwise how in the world could this be tolerated?
The Treasury Department said Wednesday that the February deficit totaled $220.9 billion, 14 percent higher than the previous record set in February of last year.
The deficit through the first five months of this budget year totals $651.6 billion, 10.5 percent higher than a year ago.
The Obama administration is projecting that the deficit for the 2010 budget year will hit an all-time high of $1.56 trillion, surpassing last year's $1.4 trillion total. The administration is forecasting that the deficit will remain above $1 trillion in 2011, giving the country three straight years of $1 trillion-plus deficits.
The administration says the huge deficits are necessary to get the country out of the deepest recession since the 1930s. But Republicans have attacked the stimulus spending as wasteful and a failure at the primary objective of lowering unemployment.
The administration defends the economic stimulus bill that Congress passed in February 2009 with a pricetag at the time of $787 billion as the right medicine to get the economy back on its feet. President Barack Obama has said even more is needed to battle an unemployment rate that remained stuck in February at 9.7 percent.
And huge deficits are necessary to get the country out of the deepest recession since the 1930s, really?
Even more is needed, really?
Naturally, with an improvement in the economic activity in the US, the focus is turning towards stabilizing the job market. Thus, the government taking the opportunity to save the day ... again ... for all those who are in crappy situations.
The thing is, the government wants to promise large amounts of additional funds to create jobs. Lucky for us, the government has the foresight that the private sector does not; theyll be able to pinpoint exactly where efficient jobs can and should be created, yielding the most benefit for the greater good ...
Errrrrrrrrrrrrrrr uhhhmmmmmm .. uhhhhhhhhhh nevermind ...
Its Friday.
John Ross Crooks III
www.blackswantrading.com
