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US Debt Prices on the Back Foot

Weekend discussions between Greece and its private lenders did not result in agreement as many had anticipated. At the same time, it has not been able to derail global equities entirely. It seems that investors have shunned the safety of US treasuries for a fourth straight session on hopes that a ‘Hail Mary’ deal by the Greek government is imminent.

With the beginning of the Chinese New Year holiday affecting market liquidity, some market moves have been slightly overextended. The US yield curve has steepened +3bps with 2/30’s moving out to +289bps, as longer dated securities lead the fall. Prices have also been pushed lower temporarily by German comments on the possibility of running the ESM and EFSF programs parallel. US 10’s are now trading on top of its first resistance point of +2.06%. The 10/30’s spread traded at +189bps, the widest point in six-weeks.

In this morning’s session, treasuries temporarily found a bid ahead of this week’s FOMC meet starting tomorrow and concluding on Wednesday. Policy makers are to introduce “major transparency” as an innovation process with individual FOMC members providing projections of the Fed Funds rates and each to explain the quantitative factors behind the projections.

Also putting pressure on prices will be the US treasury department coming to market this week to sell a total of +$99b in notes (2’s, 5’s and 7’s). First up will be tomorrows +$35b two-years, another +$35b of five-years are set for Wednesday, and finally, +$29b seven-year notes will take place on Thursday. Dealers expect this weeks issue’s to receive ‘extra’ concession, as China, a non-starter, will be celebrating New Year and providing little support. Now its back to ticker watching ahead of a Euro press conference scheduled for 20:30 GMT.

The Nikkei closed at 8,765 down -1. The DAX index in Europe was at 6,432 up +32; the FTSE (UK) closed at 5,782 up +54. US indices remained in negative territory with the Dow currently trading at 12,686 down -34.

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EUR on Supplements?

Still no Greek deal, but optimism remains that debt laden Euro-zone members will avoid a messy default. However, worries over Portugal needing fresh help has managed to temper some of this outright enthusiasm. FX price action has lacked some of that “depth” as Asia has been mostly on hiatus for a second day because of the Chinese New Year. Even the US 2-year bond auction this afternoon will require a concession due to the lack of influential participation.

The Euro group finance ministers meeting ended without any apparent progress towards a deal on private sector participation. Its been reported that the regional finance ministers have rejected the bondholders “maximum” offer and have asked negotiators to consider a coupon below +4%. The deadlines are coming and going and it’s becoming more realistic to expect these round table discussions to drag well on into next month. Apparently, not all has been in vain, ministers supposedly have reached a deal on the ESM treaty, allowing the fund to make loans without “necessarily achieving unanimous government approval.”

With the PSI negotiations ongoing, investors will now have to worry about the background noise as well. Its understood that even with a successful conclusion to the discussions, the actual degree of private sector uptake remains unclear. How can the current bout of market optimism be allowed to sustain such enthusiasm? Many of the weaker shorts have been exposed to the ‘yo-yo’ price action witnessed over the last day. Presently, and until told different, techies eye support for the single currency on dips (sub-1.30) for the moment, believing a break above 1.3073 and we have a ‘new game in town.’

Already this morning, the single currency has again been dragged into positive territory after the Euro-zone PMI releases. The headline rise above the key 50-mark has helped steady spot above the 1.30 size expiries. The composite index has been dragged higher by the better than expected service PMI data, with manufacturing high but failing to break the 50’s. For how long though?

It was no surprise last night that the BoJ cut growth forecasts, while maintaining the policy rate and leaving the QE program unchanged. Policy makers have revised down the country’s growth outlook for 2011 (from +0.3%, y/y, to -0.4%) and 2012 (from +2.2%,y/y to +2.0%) attributing the slowdown in the overseas economy and the retroactive revision of GDP stats. Meanwhile, their inflation metrics remain unchanged, believing that the global financial markets, US balance sheet adjustments and price stability in the emerging economy, all represent risks to Japanese growth. What about the yen? It’s a currency that is likely to “benefit from policy convergence and risk aversion.”

Traders will now be shifting some of their attention span to focus on the two-day FOMC meeting. The Fed may signal that it will keep its easy monetary policy for longer than previously announced. Any indication of this and market will digest it as being dollar negative. If helicopter Ben happens to move that way, the dollar carry trade should become more active.

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US Debt Prices on the Back Foot

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Japan Expected to Post First Trade Deficit in 30 Years

Japan is expected to post its first trade deficit in more than 30 years due largely to the disruption of last year’s earthquake and tsunami. The country’s automotive industry was particularly hard-hit and production lines were forced to shut down and global inventory fell to record lows.

The resulting meltdown at the Fukishima nuclear reactors continues to disrupt power supply in some areas and it is expected that it will be several more years before production levels return to normal. Until then, it is likely that Japan will continue to experience a trade deficit.

Source: Reuters

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Japan Expected to Post First Trade Deficit in 30 Years

Deja Vu EURO

The single currency price action has us trading back and forth, with the lows getting higher and the sellers becoming a tad more aggressive at the top. Fundamental releases and Greek bond discussions have thus far failed to worry either the bull or the bear. Market commentators must be finding this market boring, the longer term technicals and fundamentals have not changed that much. This current risk on trend will draw to an end if it looks as though Greece will involuntary default in March.

The past weeks Euro euphoria has happened because most investors expected the PSI discussions to wrap up fairly quickly.The market bulls will eventually become impatient. It is then we can expect them to threaten ‘this’ risk positive attitude we are experiencing at the moment. The weeks counter trend rally in the EUR outright has many eyeing a 1.32 or 33 handle, for most its a stretch. However, at these levels the world and their mothers prefer to be short as the longer term prospects for the currency remain rather gloomy. For now, investors must abide by EUR cross selling on any outright rally and better buying of the single currency until the higher lows have been truly broken again.

Thus far, this mornings German ifo data (108.3) has allowed us to witness the high and the low of the EUR’s daily range. The country’s indicators are positive for 2012, with the readings showing that further economic declines are unlikely. However, investors should know that its probably a tad early to take Germanys economic upswing for granted due to the ongoing Euro-zone debt crisis. The inconclusive result of Greek negotiations over the past few days has left the EUR and risk complex vulnerable despite what Germany can bring to the fundamental table.

The market will now turn its attention to the FOMC meetings today where we could get some excitement. No change in policy is expected, however, all members, including nonvoters get to provide, for the first time, ‘anonymous’ fed fund rate projections and accompanying qualitative explanation of the factors behind the projections. Their reason could create some volatility. The market may be too quick to interpret some of these reasons. The law of averages says we will have some outlier projections for early tightening. The market will naturally “over analysis and over-interpreted these signals” that accommodation could be withdrawn more rapidly than is now priced in. FX traders will have to keep an eye on the US yield curve. If front end yields start to rise, the dollar will be bought. The no-fun scenario? The market buys into the no rate change idea until 2014!

Note: The traditional FOMC statement should be released at around 12:30, followed by the “projections materials” including the new fed funds forecasts at around 2:00 and Chairman Bernanke’s press conference at 2:15.

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Deja Vu EURO

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Yen Falls to 2-Month Low

The yen fell to a two-month low against the dollar following news that Japan had recorded its first yearly trade deficit since 1980. Japan’s manufacturing sector is still struggling with problems stemming from last year’s earthquake and ensuing tsunami with some large production facilities still offline.

The drop in production has impaired sales of Japan’s products – particularly automobiles – and global inventories for some products are still below normal levels. The resulting drop in sales has impacted Japan’s trade balance and is responsible for the current trade deficit.

Source: Reuters

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Yen Falls to 2-Month Low

A “Dovish” FOMC

The “Exceptional” language was maintained by the FOMC after keeping rates on hold. A dovish meeting has US yields and the dollar sliding. This FOMC’s statement shows one major change from the December meeting, it now expects exceptionally low levels for FED Funds rate through late 2014. Basically, policy makers have extended their timeline by 18-months. Currently, futures prices see lower odds of an early 2014 hike, prior to the meeting it was at +20%.

The market had expected the SEP, out this afternoon, to see no tightening until 2014. This dovish report would imply that it would be late in the year. The vote was 9-1, with Lacker the one exception, refusing to give a time line.

Growth over coming quarters is seen as modest, with inflation running at levels at or below desired benchmarks. Operation twist remains in place and no fresh easing initiatives other than the ‘moving timeline’. This is clearly a dovish report allowing QE3 to remain on the table for sometime this year.

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A “Dovish” FOMC

EUR Top is Where Now?

The market sure did not see this one coming from the Fed. An “unambiguous and aggressive” statement from US policy makers is certainly laying the groundworks for QE3. With unemployment elevated and inflation subdued, Helicopter Ben can certainly put this option back on the table. The Fed has set a long term inflation target of +2%, a level they expect to fall short of this year and next. Despite the US economy appearing to be picking up steam in manufacturing, housing and employment, the goto excuse for Central Bankers, Europe and its debt laden outliers, is allowing the Fed to prepare for a third round of large-scale asset purchases.

The Fed’s extended commitment to low dollar funding costs is broadly bearish for the USD and bullish for higher-yielding G10 and EM currencies. The risk addicts are getting what they want. CAD at parity, AUD at new yearly highs, Kiwi, Mexico and other growth currencies following suite. The dollars demise has “emerging” Cbankers intervening to stem the speed of domestic appreciation and other G10 just worried for now about their appreciation. The Fixed Income dealers are taking the middle of the US yield curve sharply lower as pricing for policy tightening gets pushed back further into the future.

With the market lapping up this risk, it is intensifying the EUR bear squeeze. For now, the short positions have some of the crosses working in their favor. USD/CHF sales continue to weigh on the cross, with EUR/CHF being sold to session lows in Europe. There has been rumors of SNB interest in the mid 1.20’s over the last couple of sessions as the cross gravitates towards that Central Bank floor barrier.

An 18-month ‘exceptionally’ low yield extension will obviously take some time to price in, a job certainly not made any easier by EUR record shorts, weak shorts and a plethora of new hopeful position taking, the type who are trying to find the ideal speculative EUR top ahead of the record periphery debt issues this quarter. At such lofty heights, how much more to the top if private lenders accept a lower Greek coupon deal?

US firmer data bodes well for risk. Analysts expect a strong headline print from US durable goods this morning (+2.5%, m/m on the headline), new home sales to have reached a new yearly high and jobless claims to have risen in line with consensus. No one can argue that a dovish Fed, coupled with strong data will help risk and trigger more weak EUR stops and option barriers. Wait until the world stops spinning and pick your levels!

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EUR Top is Where Now?

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Fed Extends Near-Zero Rate Pledge; Hints at More Bond Buying

Yesterday, the Federal Open Market Committee (FOMC) statement extended the current near-zero interest rate policy another year to the middle of 2014. The FOMC also addressed the resumption of the Fed’s bond buying program.

The Federal Open Market Committee “recognizes the hardships imposed by high and persistent unemployment in an underperforming economy, and it is prepared to provide further monetary accommodation,” Bernanke said yesterday at a press conference in Washington.

Source: Bloomberg