Archived IMT (2011.04.18)

S&P sent shudders through the market as it put a negative outlook on the AAA-rating of the United States. The euro lagged badly on the threat of default in Greece, while the yen further broadened in strength as the unwinding of the carry trade escalated to the next phase. We also prepare for an Asia-Pacific session that features the RBA meeting minutes.

The S&P outlook revision pushed the yen to an 8th consecutive gain and it was easily the best G10 performer. The S&P 500 fell as low as 1294 but rebounded to close at 1305, down about 1%. The U.S. dollar initially made gains against AUD, CAD and GBP on risk aversion but that trade slowly eroded.

EUR was the big loser, after a Greek newspaper reported that officials have asked the IMF and EU with help for a restructuring. An election in Finland also showed building anti-euro sentiment and a Moodys downgrade of Irish banks deepened the wound. EUR/USD took a beating, falling below support at 1.4250 all the way to 1.4157 before rebounding to 1.4236.

At this point, with Greek 2-years yielding nearly 20% we have to believe that the market has got the message and that a Greek restructuring is priced in. The question is: 1) How much of a haircut will the market be asked to take? 2) Will Greek debt be structured in a way that appears credible and feasible? There is room for optimism but the market despises uncertainty. If an announcement of a restricting is made (likely in the next two months) expect the euro to bottom relatively quickly.

Given the two-year deadline issued by S&P and the likelihood of deadlock at least until the late 2012 election, its easy to envision a scenario where a downgrade is more likely than the one-in-three probability assigned by S&P. A downgrade would force pensions and insurance companies to cut Treasury allocations. The question is: where will that money go? We cant remember a day where we heard more talk about diversifying internationally from U.S. commentators. PIMCOs Bill Gross was touting Germany, Brazil and Canada. His sentiment was underscored by market participants as USD/CAD shot to 0.9721 on risk aversion but quickly fell back to 0.9643 a sign of strong demand for CAD at levels well above parity.

Some positive sentiment was generated by talk that the warning from S&P would kickstart a new era of co-operation and fiscal responsibility from the U.S. government. Given the scope of the cuts needed in the U.S., this is difficult to imagine

ASIA PACIFIC PREVIEW

The RBA meeting minutes from April 5 will be released at 0130 GMT. That meeting characterized policy as mildly restrictive but appropriate and the overall statement was barely changed from the previous meeting. The RBA last hiked in November and the market is not pricing in any chance of a hike at the May 3 meeting. Further RBA commentary on the Japanese disaster could be market-moving at the expense of the AUDUSD, AUDJPY and even AUDNZD. The RBA statement said they expected the broader impact to be limited but if the minutes highlight further risks, AUD could come under pressure. Commentary on AUD strength will also be key. If policymakers hint that a high AUD rate will do the work of rate hikes, we could see pressure on AUD. Hawkish talk or strong concerns from commodity inflation could boost AUD.

Other economic data in the session is minor. At 0500 GMT we get Japanese consumer confidence (prior 40.6). Japanese machine tool orders will be released at 0600 GMT with a prior y/y reading of 73.9%.

By AB - AshrafLaidi.com STaff