• Q1 US GDP 2.2% vs 2.5% exp
• Final U Mich consumer sentiment 76.4 vs 75.7 exp
• Q1 US consumer spending beats estimates at +2.9%
• Spanish govt doesn’t see jobs growth until 2014
• De Jager says Dutch will approve EU fiscal compact
• Spain to hike VAT in 2013
• Ireland makes lower GDP forecast official
• Polls put Hollande 10 points ahead
• S&P 500 gains 0.25% to 1403
• S&P 500 gains 1.8% on week
• NZD leads on day, USD lags

The US dollar slumped across the board on Friday despite a major downgrade in Spain and QE in Japan. EUR/USD hit 1.3270 in early US trading — the highest since early April. The pair chopped along sideways until a slump to 1.3237 in last-minute trading.

USD/JPY closes at the lows of the week. The dollar fell after the GDP data and slowly continued lower to 80.36.

Cable tacked on another 20 pips in US trading to 1.6259 after running as high of 1.6280 after stops were tripped.

AUD/USD made steady gains in the session, climbing above 1.0470 before settling 10 pips lower.

EUR/USD seeing a little light profit-taking late in the week after stalling just shy of 1.3275 barriers. 1.3235/40 was toppish earlier today and is providing support on sips near-term.

Have a superior weekend, one and all.

From the weekly CFTC Commitments of Traders report (all data as of the close on Tuesday):

• EUR shorts to 113K from 118K
• JPY shorts to 56K from 58K
• CHF shorts to 17K from 14K
• AUD longs to 46K from 48K
• CAD longs to 44K from 38K
• NZD longs to 9K from 12K
• GBP shifts from a net short 13K to a net long 8K (first time it’s long since Aug 2011)

The two things that pop out are 1) the shift in sentiment on GBP. A switch from short to long is a traditional bullish indicator — cable could still have room to run. 2) The continued rise in CAD longs — the loonie is growing into the darling of the currency market and poised to surpass AUD as the speculative favorite.

If you told me that at the start of the week I might have guessed it was the Fed that did QE, not the BOJ. Here is weekly currency performance relative to the US dollar:

The best trade from the weekly open until now was a USD/JPY short. On the weekly chart, however, the pair remained within the prior week’s range.

A break of 80.30 would be bearish but upcoming Golden week holidays in Japan may make for volatile trading.

By Steven K. Beckner

As Bernanke noted in his Wednesday afternoon press conference,
Dodd-Frank was designed to circumvent the “too-big-to-fail” problem by
giving the Federal Deposit Insurance Corporation authority to do an
“orderly liquidation” of a failing big bank. But there is widespread
skepticism that it will work in practice.

“I’m concerned that we haven’t solved that problem,” Philadelphia
Fed President Charles Plosser said last month. “In some sense we have
made it worse because we have bigger banks.”

More recently, Kansas City Fed President Esther George said “the
most critical issue in addressing TBTF concerns is having policymakers
with the resolve to follow through. In a crisis, there will always be
concerns about creditor or depositor panics, public confidence issues,
interconnections with other institutions and disruptions in financial
services. While I believe these concerns often are exaggerated and can
be minimized through the resolution frameworks we now have in place,
others will almost certainly have different views.”

Rosenblum warned that, in the next crisis, “a nightmare scenario
of several big banks requiring attention might still overwhelm even the
most far-reaching regulatory scheme. In all likelihood, TBTF could again
become TMTF-too many to fail, as happened in 2008.”

“While decrying TBTF, Dodd-Frank lays out conditions for
sidestepping the law’s proscriptions on aiding financial institutions,”
he wrote, “In the future, the ultimate decision won’t rest with the Fed
but with the Treasury secretary and, therefore, the president. The shift
puts an increasingly political cast on whether to rescue a systemically
important financial institution.”

Rosenblum concluded that “for all its bluster, Dodd-Frank leaves
TBTF entrenched.”

Recognizing that there are regulatory and other non-monetary forces
clogging the credit channels has not resolved the FOMC’s policy dilemma.
This was illustrated at a Monetary Policy Forum sponsored by the
University of Chicago Booth School of Business in late February.

Williams, an FOMC voter, earlier acknowledged that the “monetary
transmission mechanism” is “clogged” due to housing and mortgage credit
problems. But, rather than that being a reason for the Fed to back off
on monetary easing, he said “if the channels are clogged we need to do
more.”

But St. Louis Fed President James Bullard said he “would disagree
with the idea that because it’s clogged up we have to push even
harder.”

“If you try to push so hard on monetary policy even when the
mechanism isn’t really working, the whole thing blows up on you and you
get a lot of other problems,” Bullard warned.

If and when reserves start flowing rapidly into the economy through
banks’ lending windows, the Fed has said it is prepared to raise the
interest rate it pays on excess reserves (the IOER) to curb the pace of
money and credit growth.

After it starts raising the IOER and the federal funds rate, the
Fed would allow some passive shrinkage of its balance sheet by ceasing
to reinvest principal payments from its holdings of agency debt and
agency mortgage-backed securities in other securities and perhaps by
ceasing to roll over maturing Treasury securities at auction. At some
point, the Fed would more actively reduce the size of the balance sheet
– and bank reserves — by selling assets.

But such tightening measures appear to be far off. For now, the
FOMC will continue to chafe at credit constraints largely beyond its
control.

(3 of 3)

** MNI **

[TOPICS: M$U$$$,MMUFE$,MGU$$$,MFU$$$,M$$BR$]

By Steven K. Beckner

Columbia University Professor Charles Calomiris cited a number of
ways in which government regulations are thwarting the Fed’s effort to
expand credit and stimulate economic growth in an interview.

Because risk-based capital standards require banks to hold less
capital against Treasury securities than against loans, he said, “banks
won’t have to allocate as much capital on their balance sheets if
they’re not making loans.” Plus, “there is a lot of uncertainty about
what the capital requirements will be.”

Calomiris, a member of the Shadow Open Market Committee, also said
“banks are turning down deposits” like never before as part of their
effort to meet higher capital requirements.

The Fed’s zero rate policy might seem to assist banks in improving
their balance sheets and building their capital, but Calomiris contended
it may be having the opposite effect. With the federal funds rate and
other short-term interest rates near zero, he said banks have little
incentive to attract deposits because they can borrow funds at very low
rates without having to pay the transaction costs of dealing with
depositors and meet reserve requirements.

“Banks are basically telling people, ‘don’t bring us your money,”
he said, adding, “if this persists for a long time, banks will invest
much less in customer relationships.” And he said that “hurts the
lending channel of monetary policy.”

So the zero rate monetary policy “is likely to have very little
effect on lending for the foreseeable future,” Calomiris said.

Calomiris also alleged that new credit card regulations, designed
to protect card holders, are curbing consumer credit growth. And he said
Dodd-Frank disincentivizes mortgage lending in various ways. For
instance, he said a customer who can’t make payments on a mortgage loan
can claim that the lender should not have made him the loan as “a
defense against foreclosure.”

But Dodd-Frank is only one aspect of government policy that is
constricting mortgage credit and keeping the housing market in the
doldrums.

The dearth of mortgage lending so concerned Bernanke that in
January he sent Congress a Fed staff-written “white paper” which said
“the ongoing problems in the U.S. housing market continue to impede the
economic recovery.”

The white paper blamed “the extraordinary problems plaguing the
housing market” in part on “a marked and potentially long-term downshift
in the supply of mortgage credit.” And it blamed that “downshift” in
turn on the tightening of mortgage underwriting standards by the
government sponsored enterprises Fannie Mae and Freddie Mac.

Fannie and Freddie, which came to dominate housing finance in the
years leading up the crisis with the help of federal subsidies and which
securitized many of the mortgages that went sour in 2007, “hold or
guarantee significant shares of delinquent mortgages and foreclosed
properties,” the Fed report said.

Since September 2008, the GSEs have operated in federal
conservatorship and have taken steps to “minimize losses for taxpayers,”
noted the white paper, which went on to suggest that they may have gone
too far in that direction.

“In many of the policy areas discussed in this paper — such as
loan modifications, mortgage refinancing, and the disposition of
foreclosed properties — there is bound to be some tension between
minimizing the GSEs’ near-term losses and risk exposure and taking
actions that might promote a faster recovery in the housing market,”
the Fed document said. “Nonetheless, some actions that cause greater
losses to be sustained by the GSEs in the near term might be in the
interest of taxpayers to pursue if those actions result in a quicker and
more vigorous economic recovery.”

“Mortgage lending standards were lax, at best, in the years before
the house price peak, and some tightening relative to pre-crisis
practices was necessary and appropriate,” the white paper went on.
“Nonetheless, the extraordinarily tight standards that currently prevail
reflect, in part, obstacles that limit or prevent lending to
creditworthy borrowers.”

The Fed said the GSEs have imposed “stricter underwriting, higher
fees and interest rates, more-stringent documentation requirements,
larger required down payments, stricter appraisal standards, and fewer
available mortgage products.”

Bank of America chief economist Mickey Levy told MNI that, as a
result, “the mortgage market is just dysfunctional … even though
mortgage rates are really low now, and this is obviously beyond the
Fed’s control.”

Because banks invariably need to sell their mortgage loans to
Fannie or Freddie, they must meet their new demands, and Levy said bank
mortgage originations have dried up because the GSE’s documentation
requirements are “so onerous now” that they are pushing up
administrative costs and causing big delays between origination and loan
settlement.

Wells Fargo chief economist John Silvia says government programs
designed to help homeowners facing foreclosure have only compounded the
problem.

Asked at an Atlanta Fed conference whether additional programs
should be implemented to revive the depressed housing market, Silvia
asserted, “No. In fact, it’s counterproductive.”

“There are too many mortgage plans,” he said. “You’ve got to
stop … . The problem with housing is that you’re always changing the
rules. … You (the lender) can’t figure out what your return is going
to be.”

The larger issue is a government policy that pre-dated and, in many
minds, helped cause the financial crisis — the practice of considering
certain large financial institutions “too big to fail” (TBTF). Because
of the accurate perception that the government would bail out the
biggest banks, they were able to borrow at lower cost and thereby grow
even larger while taking bigger risks.

Rosenblum says “TBTF banks remain at the epicenter of the
foreclosure mess and the backlog of toxic assets standing in the way of
a housing revival.”

“Ensuring that banks have adequate capital is essential to
effective monetary policy,” he writes, because “banks must have healthy
capital ratios to expand lending and absorb losses that normally occur.
Repairing the damaged mechanism through which monetary policy impacts
the economy will be the key to accelerating positive feedbacks.”

But that process is taking a long time, and Rosenblum says “the
sluggish recovery is a cost of the long delay in establishing the new
standards for bank capital.”

“Given the urgent need to restore economic growth and a healthy job
market, the guiding principles for bank capital regulation should be:
codify and clarify, quickly,” he argues. “There is no statutory mandate
to write hundreds of pages of regulations and hundreds more pages of
commentary and interpretation. Millions of jobs hang in the balance.”

-more- (2 of 3)

** MNI **

[TOPICS: M$U$$$,MMUFE$,MGU$$$,MFU$$$,M$$BR$]

By Steven K. Beckner

(MNI) – One harsh reality which Federal Reserve policymakers face
as they try to sustain a modest recovery and reduce unemployment is that
the banking system, through which monetary policy works, is not playing
its normal role of channeling easier credit to the economy.

It is a problem of which Fed officials are abundantly aware. An
assortment of officials of different stripes have complained in recent
months that the “monetary transmission mechanism” is not working
properly because credit is not flowing through regular channels. So
monetary policy is less effective despite the unprecedentedly low
interest rates and high volume of reserves the Fed has provided.

“Because some creditworthy households are finding it difficult to
obtain mortgage credit or to refinance, the strong actions taken by the
Federal Reserve to put downward pressure on longer-term rates and to
improve financial conditions have had less effect on the housing sector
and overall economic activity than they otherwise would have had,” Fed
Chairman Ben Bernanke said.

San Francisco Federal Reserve Bank President John Williams said
“the monetary transmission mechanism is partially clogged” and
complained, “credit market frictions make refinancing and other housing
activity less responsive to changes in interest rates.”

Atlanta Fed President Dennis Lockhart observed “the transmission
mechanism of monetary policy is — choose your adjective — broken,
clogged, impaired.”

This clogging “means low rates aren’t stimulating much in the way
of credit growth,” said Lockhart. “It means some bankable loan demand is
not being met in spite of ample liquidity. And it means final demand for
goods and services remains subdued and the added employment that growing
final demand ought to generate is slow to materialize.”

But it’s a problem which policymakers feel somewhat helpless to do
a lot about. Indeed, some observers, as well as some officials
acknowledge that the Fed’s own banking regulations, mandated by
Congress, are part of the problem.

Bernanke, in an April 9 speech, said that, henceforth, financial
stability policy will “stand on an equal footing with monetary policy as
a critical responsibility” of the Fed and other central banks.

But some fear that efforts to guarantee financial stability and
avert another financial crisis have gotten the upper hand over monetary
policy.

The Fed has a wide-ranging mandate as the United States’ chief
financial regulator, under the 2010 Dodd-Frank Wall Street Reform and
Consumer Protection Act, to impose reforms aimed at correcting problems
that led to the financial crisis.

The Fed and its fellow regulators are in the process of increasing
capital requirements and liquidity buffers; imposing larger capital
cushions on the largest most “systemically important” banks; restricting
certain bank activities; issuing rules designed to protect consumers,
and promulgating numerous other regulations, as required by the
2,319-page law and by the Basel III international capital accord.

Under Basel III, starting next year, banks will have to phase in
higher capital standards. Their common equity ratios will go from 2% to
4.5% and their Tier I capital from 4% to 6%. The accord, reached by U.S.
and foreign regulators, also imposes additional capital buffers and a
minimum 3% leverage ratio.

The Fed has conducted stress tests to determine whether the largest
banks have sufficient capital to weather adverse economic and financial
scenarios. If not they must come up with more capital. Meanwhile, it has
been developing regulations to implement the innumerable sections of
Dodd-Frank — sometimes resulting in considerable resistance and
controversy, e.g. the so-called “Volcker Rule” restricting proprietary
trading.

While higher capital requirements are widely acknowledged to be a
good thing — indeed essential to the restoration of sound lending –
the process of implementing them is painfully slow, and in the meantime,
bank credit growth languishes.

To meet higher capital requirements, as well as to correct for past
excesses, banks have often curtailed their lending. Uncertainty about
the economic outlook, along with limited credit demand, have also
contributed to the lending restraint. As a result, there has been only
meager growth in the credit aggregates.

True, commercial and industrial loans grew by 9.9% last year after
contracting by 8.9% in 2010 and by 18.6% in 2009. C&I loans have
continued to rise so far this year, though at a diminished rate. They
were up an annualized 8.6% in March.

But total loans and leases, the credit aggregate that excludes bank
securities investments, continue to grow very slowly. After plunging for
two years, they were up in 2011, but only by 1.8%. Total loans and
leases grew just 1% at an annualized rate in March, as real estate and
home equity loans remained weak.

Consumer loans, which fell 0.7% last year, have picked up a bit
lately, but still grew just 3.6% in March, after two months of decline.

The anemic growth of credit helps keep money supply growth and in
turn inflation under control, because banks’ excess reserves built up
through quantitative easing are remaining largely immobilized. But the
inflation engine is idling at the cost of sluggish economic growth and
still-high unemployment.

Many members of the Fed’s policymaking Federal Open Market
Committee would undoubtedly prefer to have the problem of having to
combat excessive lending, money growth and wage-price pressures than
have to deal with a stalled credit motor.

Despite keeping the funds rate near zero for nearly 3 1/2 years and
buying more than $2 trillion of bonds to push long-term interest rates
to historic lows, economic growth has remained subpar, unemployment
remains at 8.2% and job gains have slowed.

Fed officials have been pulling their hair and asking, “Why?”

The answer they have come up with, in many instances, is that
monetary policy is butting heads with bank regulatory policy.

Harvey Rosenblum, director of research for the Federal Reserve Bank
of Dallas, blames Dodd-Frank in part for the sluggish bank lending that
is impeding the Fed’s low rate policy from translating into stronger
credit growth.

“The verdict on Dodd-Frank will depend on what the final rules look
like,” he wrote in the Dallas Fed’s recently released annual report. “So
far, the new law hasn’t helped revive the economy and may have
inadvertently undermined growth by adding to uncertainty about the
future.”

“A prolonged legislative process preceded the protracted
implementation period, with bureaucratic procedure trumping
decisiveness,” Rosenblum continued. “Neither banks nor financial markets
know what the new rules will be, and the lack of clarity is delaying
repair of the bank-lending and financial market parts of the monetary
policy engine.”

-more- (1 of 2)

** MNI **

[TOPICS: M$U$$$,MMUFE$,MGU$$$,MFU$$$,M$$BR$]

Gold has pushed even higher today after weaker data spurred on hopes for more QE. That tends to weaken the dollar and benefit gold.  However,

• The 100 day MA at 1667.90 has stalled the rally today
• The price has consolidated over the last 5 or so hour with support eyed at 1661.80 area where the 38.2%  of the last move higher is found (see 5 minute chart below). It is also where trendline resistance was broken on the daily chart (see chart above).  

So traders have a decision to make -

• Take another shot at pushing above the 100 day MA (the last two times failied) or
• Push the price below the support and continue to trade in the range. 

 It  seems like traders might defer that choice  until next weeks begins.  Keep these levels in mind.

MarketWatch has a few handy charts breaking down Q1 GDP, including this one:

This sounds like spin to me but some analysts are saying the BOJ did “as little as possible” or disappointed expectations for more. To me, the story in USD/JPY is about a broad  USD selling, but to each their own.

PM Noda also immediately called from more “bold” action from the BOJ.

EUR/USD reached 1.3267 on this run and is now stalling amid the familiar chatter of  1.3275 barriers being protected. More barriers are rumored at 1.3300.

Risk is brisk in quiet Friday afternoon trade as the S&P tacks on another 0.4% and the commodity currencies rally strongly.

In an earlier post (” GBPUSD keeps the momentum going as buyers remain in control “) the technical case for the bulls was made with the price extending up trendline resistance at 1.6216 and 1.6226.  When trends accelerate, the traders who trade against the trend need to prove they can take back control. They could not (low reached 1.622736) and the selling stopped. 

Where to now? The price is now looking to enter  the consolidation area from July to August in 2011. The low close price from August 12 to August 30th came in at 1.62785 (on August 25th 2011). This is the next upside target. Also near  this level is another trendline resistance line at the 1.6273 level (see chart below).  Above that looks toward the 1.6337.  Of course, the 1.6300 area is likely to attract the typical selling interest.

On the downside (see chart below),  traders will likely lighten up on a move below the 1.6252-58 now. This is the 38.2%-50% of the last leg higher and also brackets the last high at 1.6256.   The sellers have not taken firm control yet.  Maybe there is a reason to sell here (see above) but that is simply step one.   They need to do more to prove the trend is over.

AUD/USD hit some buy stops through 1.0450, touching 1.0464 — the highest since early April.

Offers remain at 1.0465 but with stops above the April high of 1.0471 is easily within reach. Further offers are said to lurk from 1.0480 to 1.0500.

A close above 1.0471 would be a technical buy signal on the daily and weekly charts.

A. “Risk on” refers to the reflation trade, the idea that the global economy is in recovery and safe-haven plays like long dollars, long US Treasuries, long Swiss franc, long Japanese yen are being liquidated. Typically, in a “risk-on environment, the  dollar falls against most currencies, particularly commodity currencies, on  the idea that fast-growing economies like China will be large consumers of raw materials.

“Risk off” is the reverse. Traders want safety and look for it in the US dollar, US Treasuries, etc and they want to avoid commodity currencies for fear of lower global growth.

US bond yields tend to fall in a risk-off environment and went to rise in a risk-on environment. Investors move out of the safety of low yielding bonds when prospects for higher returns elsewhere improve.

By Kasra Kangarloo

WASHINGTON (MNI) – Nonfarm payrolls and ISM manufacturing will be
the most prominent releases next week, as well as a string of other
employment data and auto sales.

Payrolls are expected to rise more than last month’s disappointing
figure, though still below the above-200,000 pace that exploded market
expectations earlier in the year. Initial jobless claims have also
receded from their downward trend, pushing back above 380,000 claims for
each of the last three weeks. This is still a healthy level for initial
claims — any level below 400,000 is regarded by economists as an
indicator of jobs growth — but the upward trend indicates that the job
market may be losing momentum.

Nonfarm payrolls will be released Friday at 8:30 a.m. ET and
initial jobless claims will be released Thursday at 8:30 a.m. ET.

There are two other employment indicators for the week — the
Automatic Data Processing employment report, to be released Wednesday
at 8:15 a.m. ET and the Challenger job cuts report, to be released
Thursday at 7:30 a.m. ET.

The ADP report is expected to be on par with the payrolls report in
terms of job gains, though the month-to-month correlation between the
two can be shaky. Markets, however, will likely still react strongly to
any surprises in the report.

The ISM reports for the manufacturing and non-manufacturing
sectors, to be released Monday at 10:00 a.m. ET and Wednesday at 10:00
a.m. ET, respectively, are each expected to maintain their modest
strength.

ISM manufacturing has hovered between 50 and 55 for most of the
past year, a level that indicates only mild expansion in the sector.
Even a modest fall in the index could spook markets, as the
manufacturing sector has been the bedrock of the recent strengthening in
the recovery, due to renewed auto sales and the resilience of consumer
appetite for big-ticket items.

The Chicago Report, also nicknamed Chicago PMI, will be issued at
9:45 ET Monday.

Auto sales will also be released during the week and are expected
to continue the strong pace set during the first quarter. Auto sales
have been a significant driver of growth in the early months of the
year, due largely to replacement purchases resulting from a record-high
average age for the U.S. vehicle fleet. Auto sales will be released
throughout the day on Tuesday.

Personal income, to be released Monday at 8:30 a.m. ET, is expected
to increase a modest 0.3% over the month, after two straight months of
0.2% growth. The recent improvements in consumption could be limited
until larger improvements are seen in average income, so any upside
surprises in the number could move markets.

Other reports over the week include construction spending on
Tuesday at 10:00 a.m. ET, first quarter productivity on Thursday at 8:30
a.m. ET, factory orders on Wednesday at 10:00 a.m. ET, and the Mortgage
Bankers’ Association mortgage application index on Wednesday at 7:00
a.m. ET.

Here is a list of Federal Reserve speakers for the week:

Dallas Federal Reserve President Fisher will speak on the jobs
market at the Milken Institute Global Conference in Los Angeles on
Monday at 5:30 p.m. ET.

Minneapolis Federal Reserve President Kocherlakota will speak on
the Indian economy in Washington, D.C. on Tuesday at 9:30 a.m. ET.

San Francisco Federal Reserve President Williams will speak on the
economy at the Milken Institute Global Conference in Los Angeles, CA on
Tuesday at 11:00 a.m. ET.

Atlanta Federal Reserve President Lockhart will speak on monetary
policy at the Milken Institute Global Conference in Los Angeles, CA on
Tuesday at 12:30 p.m. ET. Chicago Fed President Evans is also a speaker
and both will be interviewed today on CNBC as well.

Philadelphia Federal Reserve President Plosser will speak on the
economic outlook in San Diego, CA on Tuesday at 3:00 p.m. ET.

Federal Reserve Governor Tarullo will speak on regulatory reform in
New York, NY on Wednesday at 8:00 a.m. ET.

Richmond Federal Reserve President Lacker will speak on the economy
in Norfolk, VA on Wednesday at 12:30 p.m. ET.

San Francisco Federal Reserve President Williams will speak on the
economy in Santa Barbara, CA on Thursday at 11:00 a.m. ET.

Atlanta Federal Reserve President Lockhart will speak on the
economy in Santa Barbara, CA on Thursday at 1:00 p.m. ET.

Philadelphia Federal Reserve President Plosser will speak on the
economy in Santa Barbara, CA on Thursday at 1:30 p.m. ET.

— Kasra Kangarloo is a reporter for Need to Know News

** MNI Washington Bureau: 202-371-2121 **

[TOPICS: M$$FI$,M$U$$$,MAUDS$]

Two french polls show, according to Bloomberg.

Bon soir, Nikolas…

Portugal has completely shrugged of a downgrade of its neighbor and yields closed down dramatically today.

Yields fell 43-116 basis points on borrowing out to 15 years. Ten-year yields jumped 60 basis points at the open but closed down 40 bps on the day.

The fall in 3-year yields is especially dramatic today and they’re down to 11.23% from 14% two weeks ago.

To me, it looks like someone (foreign?) is methodically adding to longs on expectations that Portugal will not default.

The inflows alone, wouldn’t be nearly enough to move EUR higher but optimism about the riskiest debt market in the eurozone might be. The move could also be reflecting optimism about a fiscal compact and/or eurobonds in 5-10 years.

Q. I just cannot understand the EUR/USD. Is this a anti USD play? Or is this just a short squeeze? Reserve diversification. What more bad news does it need to start trending down?

A. EUR/USD is being supported by reserve diversification but a large part of the underlying strength is a result of the deleveraging of European bank balance sheets. In order to clean-up over-leveraged balance sheets, banks are shedding assets overseas in unprecedented amounts and bringing capital back to Europe.

Here is one recent example of one such divestiture. There are countless more like them as money is pulled from the US, Latin America and Asia.

• 2012 GDP lowered to 0.7% from 1.3% earlier
• 2013 cut to 2.2% from 2.4% previously
• Debt to GDP forecast to peak at 120.3% in 2013 from 119$ previously
• If conditions allow, will seek to sell longer-term debt later this year
• Deficit seen at 8.3% of GDP this year, below target of 8.6%

Reuters/Bloomberg headlines. The GDP cuts were tipped yesterday, if not before…

The Spain downgrade last night to BBB+, took the S&P rating below the rating from Moody’s of A3 by one notch (see equivalent rating scales in the chart below). 

Fitch, on the other hand, has Spain Long Term debt at single A which is above Moody’s rating by one notch and above S&P’s rating by two notches now.  This may suggest that Fitch might be pressured into lowering  it’s rating sometime soon.

As Jamie pointed out in his post this morning (“Downgrades ain’t what they used to be….” ), the good ole sovereign downgrade just does not have the sting it once had.   So although further catch-up downgrades are possible from Moody’s and Fitch,  perhaps we can look forward to a futher rally in the EURUSD after the next shoe falls (or will it fall?).  It stinks when the market does not do what you think it should do….