USD Edges Higher, China Threatens Ahead of Meetings

Economic news was light. New home sales were 300K vs. 280K expected. Feb was revised to 270K from 250K. The Dallas Fed fell to 8 from 24. Portugal conceded its budget deficit will be significantly higher than the 9.1% of GDP expected. Worries about global growth crept in with copper falling as much as 3% at one point. Oil, gold and silver all hit cycle highs then retreated. Silver fell from above $49 to $47.25 after the CME hiked silver margin rates by 9%. Such hikes have had minimal medium-term impact in the past.

Two late headlines should continue to eat into sentiment. First, S&P lowered its outlook on 6 Japanese auto companies, including Honda and Toyota due to the earthquake. They said production wont fully rebound until October. This increases the chances of further disappointing trade balance figures. News reports also suggest the Bank of Japan will cut its 2011 GDP forecast to 0.8% from 1.6%. USD/JPY edged lower but is losing its downside technical momentum as it failed to breach the April 20 low of 81.61. This is key s/t support. Second, Netflix beat on earnings but their outlook was soft and the high-flying stock fell 4.5% after hours. That should keep pressure on sentiment after a 0.2% fall in the S&P 500 on Monday.

ASIA PACIFIC PREVIEW

New Zealand business confidence from the National Bank is due at 0100 GMT and is the lone economic indicator in the Asia-Pacific session. The prior reading was -8.7 after four consecutive readings in the +30 range. There is no consensus but the market will be expecting a reading above zero. Its the final economic data point before the RBNZ meeting on Thursday. NZD/USD is being supported by 80.00 after breaking above the psychological mark last week for the first time since 2008.

China failed to deliver on a weekend revaluation rumour but three other important headlines crossed. 1) Officials said they need to guard against falling U.S. Treasury prices. 2) The PBOCs Zhou said Chinas $3 trillion in fx reserves exceeds a reasonable requirement. 3) The CEO of a state-owned investment company said reserves should be diversified and lowered to $1.3 trillion.

In short, China is threatening to cut its investments in U.S. Treasuries by $1.7 trillion. In comparison, the sum total of Q1 and Q2 is around $2.6 trillion and there is about $14 trillion in marketable debt outstanding. The consequences would be considerable. No surprise then that on Monday the Treasury Dept. announced a US-China meeting for May 9-10 in Washington. We see the Chinese comments as political maneuvering aimed at quieting U.S. calls for a yuan revaluation at those meetings but we also expect some measure of diversification in the near future. This will hurt the USD as we look for them to invest in: a) resources and resource companies b) real estate, especially arable land c) places where their money buys maximum political influence esp. distressed govts. Primary targets will be in the developing world but Australia, Canada and the European periphery will also benefit.

By AB AshrafLaidi.com Staff