Catalysts for Change in the FX Driver

The main driver that has led to a persistent decline in the US dollar through the last several months is the divergent thrust of monetary policy. It has left the Federal Reserve as a laggard in the global cycle and, in turn, has left the dollar with little support. Indeed after performing well following the announcement of QEII last November, the greenback’s fall from grace can be traced, with the benefit of hindsight, to the ECB’s first press conference of the year on January 13, when the hawkish signaling began.

The FOMC and Chairman Bernanke confirmed last week, as many had expected, that the current program of Treasuries will be completed as planned by the end of June. For an unspecified period after that, the Federal Reserve will continue to replace the maturing mortgage backed securities with Treasuries and thereby maintain the size of its balance sheet. Shortly after the Fed finishes QEII proper, the ECB is expected to deliver its second interest rate hike. It may very well deliver a third hike by the time the Federal Reserve begins to allow its balance sheet to shrink.

Yet as we have seen sometimes the main driver can be interrupted, mitigated and even reversed. Given market positioning, the strength of the trend and sentiment, it makes sense for investors to consider near-term catalysts that could dilute the impact of the divergent monetary policies. Here we will consider two: mounting pressure that would make a Greek restructuring imminent and developments in Spain.

Win Thin: Bernanke is giving a green light to the risk-on trade

Win Thin of Brown Brothers Harriman was on Bloomberg talking to Tom Keene and Michael Cloherty, head of U.S. rates strategy for fixed income and currencies at RBC Capital Markets, about the global markets for a good fifteen minutes today. Just as I recently posited, Win sees the Bernanke press conference giving a green light to speculators running risk-on dollar-short trades as well. You may think these markets are overvalued. But Bernanke is telling us that zero rates will prevail. That means risk-on. And while they may not be trying to debase the dollar, a byproduct of low rates in an environment where rates are increasing elsewhere is a low dollar. Much more in the video

More on the currency wars and negative real rates

Now that the Fed has confirmed it won’t raise rates and the dollar is dropping, for me it means that negative real rates will continue and that the currency wars are back on. I have comments on what negative real rates mean for investors. I also talk about my suspicion that this time around in the currency wars, China will get the stick instead of the US because of the Dollar peg

Emerging Markets: Turkey Currency Outlook Deteriorates As Inflation Forecasts Raised

The Turkish lira is under pressure today, and is also due to some market concerns with central bank credibility. Like in Brazil, Turkey macroprudential policies simply have not worked

Is The EMU Debt Crisis Morphing into a Euro Positive Force?

We argue that a key driver lifting the euro has been the divergent monetary policies of the Federal Reserve and the

Ben Bernanke’s Press Conference

Today marks the first time we are witnessing a regularly scheduled news conference by a Fed chairman in the Federal Reserve’s 98-year history. Most reactions to Ben Bernanke’s performance were positive, meaning he reiterated the themes he has consistently delivered in the past without making any gaffes. But that goes to style; what about substance? Here’s my take

Thinking about Haircuts

What a cruel month April has been to the peripheral debt markets. Greek 10-year yields have risen 349 bp, more than the cumulative increase over the previous 11 months. Portugal’s 10-year yield has risen 180 bp this month and 190 bp over the previous 11 months. Of the three, Ireland has performed best with the 10-year yield rising 42 bp this month after rising 460 bp in the prior 11 months.

The surge in two year yields is even more pronounced. Greece’s 2-year yield has risen almost 1000 bp this month, including the 140 bp today. Portugal’s 2-year yield has risen 460 bp and Ireland’s yield has risen 175 bp.

Surely a great deal of bad news has been discounted. However, back of the envelop calculation warns of the risk that additional and steep increase in rates in order to fully price in a restructuring

Brazil Markets Search For Direction After Holiday

Brazil current account deficit came in at a wider than expected -$5.7 bln in March, but was fully covered by FDI totaling $6.8 bln that month. On a 12-month rolling basis, FDI was $60.4 bln vs. a current account gap of -$49.8 bln, pushing the basic balance up to +$10.6 bln, the highest since September 2009. As a share of GDP, the current account deficit has remained around -2.3% since September 2010. Finance Minister Mantega said that through the 26th , FDI totaled $4 bln in April and so the inflows remain strong and supportive of the real. And this doesn’t even include any of the portfolio inflows. A slow grind lower for USD/BRL remains in play, though markets will be nervous around 1.5545, the 2008 low as more FX measures are likely to be seen on a break towards

More thoughts on the new communications strategy at the Fed

The Fed chairman is now crafting the Fed’s public image just as politicians do. The press conference is a part of that pubic relations campaign. What should we expect then?

FOMC Preview: Bernanke’s press conference has the potential to be disruptive

Whatever thunder the FOMC meeting usually has is being stolen this week by the first of Bernanke’s press conference tomorrow. In fairness, the FOMC’s statement is unlikely to change substantively from the mid-March statement. The press conference has potential to be more disruptive, but even here it is best to keep in mind the distinction between transparency and visibility

Is It 1994 Again?

Fred Sheehan argues that it is unlikely that Ben Bernanke will raise rates. He says either the market or a successor will do so. He adds that there are several similarities between current trends and those in 1994, a year when many institutions were left destitute. Historical analogies can help us imagine what might happen, but identification of differences should be noted too

More cautious optimism?

Overall, I would say that the exogenous shocks have added to downside risk. I would expect economic weakness in the second half of 2011.

If economic weakness does materialize in the US, I would expect lower long-term interest rates. Many are predicting QE2 will lead to higher rates. But why would that be the case in an environment of economic weakness in which risk assets could sell off? Watch the ECRI index for signs that the economy is weakening