forex weekly news : Market comment

Market Comment:
The UK budget continues to garner attention, in particular in relation to the big increase in government funding and debt issuance. An article in the UK’s Telegraph highlighted that ratings agencies Moody’s and S&P were both reviewing the UK’s AAA rating as the national debt is expected to peak at almost 80% of GDP in 2013. Note that last November S&P’s director of European sovereign ratings Frank Gill said that public debt above 60% of GDP could undermine a AAA rating. This was reflected in downgrades for Spain, Ireland, Greece and Portugal. A downgrade would of course be a disastrous result for the UK just as debt issuance is hitting record levels. These concerns were reflected in FX-land and GBP was predictably pressured during the Asian session, giving back 30% of its gains since early yesterday.
US data was on the disappointing side last night with existing home sales coming in worse than expected at -3.0% m/m, reversing February’s gains, and initial jobless claims also giving back almost 60% of last week’s improvement, coming in at 640k, albeit in line with market expectations. There was further deterioration in the continuing claims data, a more reliable indicator of underlying trends, which rose to a series high of 6.137 mln from 6.044 mln last week. This was pointing towards another day influenced by the risk aversion theme but a late spurt on Wall St on the back of above-forecast earnings from some US regional banks saw this theme rejected. Instead, risk appetite returned, putting the greenback under pressure and rescuing the more vulnerable currencies (notably GBP).
The Bank of Canada surprised markets with its Monetary Policy Report when it announced it did not plan to implement quantitative easing at this time. BOC Gov Carney stressed that the current policy stance, with the o/n target rate at its effective lower band and remaining there at least until Q2 2010, were appropriate for achieving growth and inflation targets. GDP is expected to decline by 3.0% in 2009, grow by 2.5% in 2010 and 4.7% in 2011. He added that any employ quantitative or credit easing would be announced at the regular rate announcement dates, effectively delaying any further discussion on the topic to the next meeting on June 4. The CAD had a field day against the dollar, with USDCAD sliding to its lowest level since Monday, and has sat there during the Asian session, notably just on the 200-hour moving average.
The Fed also released its annual financial statements yesterday which gave the first detailed breakdown of the Maiden Lane portfolios, established to acquire the $30 bln in assets from Bear Stearns in order to facilitate its merger with JP Morgan Chase. The portfolio experienced unrealized losses of about $5.5 bln with the value of commercial mortgage securities declining 28% to $5.6b and its residential portion declining 38% to $0.9 bln. Additional portfolios were created to house the distressed securities of AIG and these also experienced net losses last year.
Looking ahead to today, US data is again expected to show a reversal from February, with durable goods orders due at 1230GMT. February’s rebound marked a halt in the 4 month series of sharp declines with the median consensus for a 1.5% fall. Over in Europe, the encouraging start to Q2 posted by the flash PMI estimates may be extended when we see the German IFO Business climate and expectations data. This is also expected to show an improvement to 82.3 from 82.1 for the climate, and 82.6 from 81.6 for the expectations index. The UK on the other had is unlikely to find much comfort from its data releases today. Preliminary Q1 GDP numbers are seen at -1.5% q/q and -3.8% y/y but with a risk of a disappointment to the downside. Retails sales are also expected to show a rebound though the consensus estimates of -0.3% m/m and +1.1% y/y for March looking optimistic.
Have a great weekend.