Tuesday, December 7, 2010

Overnight USD Gains Given Back in NY


The USD gained ground against the majors overnight, before giving back some of the gains during the North American session, as the Dow traded sideways in lackluster trading on a day bereft of market moving news.


EU: Former IMF Chief Economist and Harvard Professor Kenneth Rogoff said that Europe's debt crisis will probably result in bond restructuring in Greece, Ireland and Portugal. "They can't just be in a state of denial" and "they've tried to guarantee everything." However, Rogoff said that "we'll be very lucky to avoid restructuring" in countries such as Greece, Ireland and Portugal. Rogoff also said that German Chancellor Angela Merkel has been "talking sense." Merkel has said that "we have to look ahead to the end game, there's going to be a debt restructuring, how are we going to deal with it?" However, Rogoff said that "nobody else wants to talk about it." Separately, Rogoff described the European bank stress tests last July as "really scary" and "pathetic."

EU: ECB Council Member Guy Quaden said that he favors increasing the size of the 750B EUR European Financial Stability Fund. "It's up to politicians to decide that, but personally I'm rather in favor (of it)," Quaden said. "The situation of the public deficits is much less worse in Europe than it is in the United States." There is a need for "more political union" within the Eurozone. "What we need is more fiscal discipline in Europe and more economic discipline in general," he said. "To do Eurobonds, there needs to be some political conditions fulfilled which are probably not present today."

EU: Former BOE Deputy Governor John Gieve said Eurozone officials must aid Spain to stop a loss of investor confidence from spreading across the region in an echo of the turmoil after Lehman Brothers Holdings Inc. collapsed. "If the euro area waits for the crisis to deepen and spread before acting, there is a real risk of a run on their banks like that in 2008," he wrote today in the Daily Telegraph newspaper. The region "needs urgently to establish a firewall against contagion by identifying a country which can demonstrate its ability to meet its debts and then giving it full support." "One lesson of 2008 is that once market confidence begins to ebb, it develops its own momentum," he wrote. "The euro area is standing on the brink of such a meltdown today."

EU: Greek Prime Minister George Papandreou said European policy makers "need to seriously discuss" proposals for joint issuance of bonds. However, Austrian Finance Minister Josef Proell said he is "very critical" of proposals for joint bond issuances, and sees "no reason" to boost the size the the 750B EUR Financial Stability Fund. Proell said joint bond sales would force fiscally disciplined countries such as Austria to subsidize the borrowing of less virtuous countries.

US: Nobel Laureate Joseph Stiglitz said the Fed's 600B USD QE II plan is unlikely to boost US economic growth, and called for additional fiscal stimulus instead. "I am very pessimistic that quantitative easing will have any significant effect," Stiglitz said. "I think the stimulus package we had worked. It did stimulate the economy. If it weren't for that, the unemployment rate would have been even higher." Stiglitz also said that quantitative easing may lead to "speculative bubbles" and weaken the USD. He called it the 21st Century equivalent of "beggar they neighbor" competitive devaluations that took place during the Great Depression.

US: Richmond Fed President Jeffrey Lacker said that while inflation is "well contained" now, that should not be taken for granted. "Historical experience, including the inception of the 'Great Inflation' of the 1970's, suggests that central banks should be careful not to steer monetary policy off course by targeting the unemployment rate," he said. "Further balance sheet expansion now could require more rapid balance sheet reduction later on, complicating the withdrawal of monetary stimulus when it becomes necessary to maintain price stability," he said. Lacker added that "it will take sustained, above-trend GDP growth for unemployment to decline meaningfully." Lacker indicated that "deflation is clearly even less of a risk than it was a few months ago."

Canada: The Ivey PMI unexpectedly rose in November to 57.5 in November from 56.7 in October, on consensus expectations of 56.4. The inventory gauge fell to 41.7 in November from 46.4 in October, signaling stockpiles are falling at the fastest pace in a year, while the price index fell to 60, the slowest pace of cost increases in four months. Supplier deliveries fell to 44 from 50 and the employment index advanced to 54.8 from 51.7.

Canada: Building permits declined -6.5% m/m in October from 15.3% m/m in September, on consensus expectations of -4.0%. Residential permits decreased -11.2%, single-family permits fell -9.4% and multiple-unit structures dropped -13.6%. Permits for non-residential construction rose 0.1%, while commercial projects rose 8.8% - the highest since May 2008. Institutional permits fell 20.4% following a 23.7% increase in September. By province, Ontario and Quebec led declines in both residential and non-residential projects.

Brazil: Finance Minister Guido Mantega said that the economy will grow by an average annual rate of 6.1%r from 2011 through 2014. Moreover some cities, such as Rio de Janeiro and Porto Alegre, are already near full employment, he added.

Dow 11,362.19.78, -0.2%; NYMEX Crude Oil $88.87, -0.4%

The USD gained ground against the majors overnight, before giving back some of the gains during the North American session, as the Dow traded sideways in lackluster trading on a day bereft of market moving news. The EUR/USD fell as low as 1.3247 by 8:37am EST from an overnight high of 1.3423, before trading back to 1.3315 by the close. Similarly, GBP/USD fell as low as 1.5656 by 6:32am from overnight highs of 1.5775, before trading back to 1.5720 by the close. Elsewhere, USD/JPY rallied as high as 82.99 from 82.57, before trading back to 82.70 by the close. In the dollar-bloc, USD/CAD as high as 1.0083 by 8:31am from an overnight low of 1.0022 trading back to close at 1.0050, while AUD/USD traded as low as 0.9849 by 5:47am from an overnight high of 0.9927 trading back to 0.9900 by the close. Global equity markets were unremarkable, closing +/- 0.5% for the day with the notable exception of a -1.3% drop in the Spanish IBEX. Earlier USD gains appeared to undermine commodity prices with the NYMEX crude oil benchmark off -0.2% from the day to close at $88.87/bbl.

Flow Analysis:

Our iFlow FX indicators show the Euro is under renewed selling pressure as Eurozone policy-makers remain divided vis-à-vis measures to be taken to combat the region's sovereign debt crisis. Suggestions including the expansion of a Eurozone bail-out fund and the introduction of a joint European government bond are not favored by German Chancellor Angela Merkel, for example. France's President Nicolas Sarkozy is also against adding to the region's rescue fund. These policy disagreements and lack of a unified, coherent strategy is weighing on investor sentiment. In addition, our iFlow bond indicators confirm the ongoing policy uncertainty in the Eurozone and concerns that Germany may have to take on a bigger burden to support the region's monetary union have continued to lead to net selling of German bunds – we have now seen two more consecutive days of net outflows after heavier selling pressure the past two weeks.

Indeed, the past few weeks have seen the 10-year German bund yield climb to as high as about 2.85% from levels close to 2.4% in mid-November. The 10-year German bund - US Treasury spread has narrowed from 90 bps in April to only 11 bps currently as the piecemeal response of Eurozone policy-makers to the region's sovereign debt crisis has steadily added to German borrowing costs. A 10-year German bund auction on November 24 failed to attract bids for the full amount. Elsewhere, our iFlow FX indicators show renewed net buying of the US dollar, albeit at a modest pace for now. Amongst other G-10 currencies, the Australian dollar, Swiss franc and Swedish krona are out of favor, apart from the Euro. Amongst global stock markets, our iFlow equity indicators show investor appetite for Asian exposure remains in place – we are seeing ongoing purchases of stocks in South Korea, Malaysia, India, Indonesia, Hong Kong, Philippines, Thailand, Taiwan and China continue apace.

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