While the G-20 and the G-7 haggle among each other, all (with perhaps the exception of France) desperate to make it seem that Japan's recent currency manipulation is not really manipulation, and that the plunge in the Yen was an indirect, "unexpected" consequence of BOJ monetary policy (when in reality as Richard Koo explained it is merely a ploy to avoid the spotlight falling on each and every other G-7/20 member, all of which are engaged in the same type of currency wars which eventually will all morph into trade wars), Europe's energy powerhouse Norway quietly entered into the war. From Bloomberg: "Norges Bank is ready to cut interest rates further to counter krone gains that interfere with the inflation target, Governor Oeystein Olsen said. “If it gets too strong over time, leading to inflation that’s too low, we will act,” Olsen said yesterday in an interview at his office in Oslo.
Goldman recaps the past tumultuous week, and looks at events in the next 7 days, of which the key feature will be the next "latest and greatest" and most disappointing European summit on Thursday and Friday, where not even Greece is going any longer, and which not even the most resolute Europhiles expect to resolve anything: "The key event of next week is the EU summit. The latest European Economics Analyst details our expectations. In brief we expect to see finalization of the much-anticipated growth compact, involving financing for infrastructure investment and a restatement of the agenda for structural reform. We also expect announcement of a plan for ‘banking union’ in the Euro area, even if, owing to unresolved political differences, details are likely to remain sketchy on key issues—notably on how the implicit cost of providing fiscal backing for the Euro area banking system will be shared across countries."
One month later the purge is over: "Norway’s sovereign wealth fund sold all its Irish and Portuguese government bonds after rejecting the Greek debt swap and warned that Europe faces considerable challenges." Wait, what's that? The Eurozone's political strongarming (think Steve Rattner and GM) was unable to force the world's most powerful sovereign wealth fund into agreeing to what was essentially extortion when bank after bank noted how delighted they are to be bent over and take an 80% writedown on their Greek holdings. Stunning. But at least we now know who will be suing Greece shortly in an attempt to recoup par value of their strong law bonds: grab the popcorn - Norway vs Greece will be quite a spectacle. As for their dump of Irish and Portuguese bonds, no surprise there: fool me once (in perpetuity) shame on me, fool me twice, shame on Dan Loeb... who was buying everything Norway was selling. We wonder who ends up right.
This week brings policy decisions in Taiwan and Thailand. The CBC decision will be very interesting to watch. The December statement at the time was surprisingly hawkish, only to be followed by a large upside surprise in inflation, and the TWD was subsequently allowed to appreciate. Given that the bank continues to view inflation as a major problem, according to quotes from Reuters, it will be very interesting to see how the bank weighs up concerns about hot money inflows vs the need to contain inflation risks. In particular, in the face of imported inflation pressures via higher commodity prices, many central banks may shift towards accepting the need for more currency strength. The week also brings some important central bank commentary. The RBA governor has an opportunity to opine on the recent slew of weak Australian data, as well as developments in the A$. There is quite a bit of commentary from Fed officials on the docket, including from Bernanke, which we will dissect for information on the further direction of policy. More dovish commentary than that of the FOMC last week, would arguably be a surprise and potentially dampen, if not reverse some of the moves of last week.
Earlier today, in the very appropriate context of Greg Smith, we lamented the resent disappearance of everyone's favorite FX strategist, Thomas "9 out of 9" Stolper. Speak of the squid - here he is, this time advising clients they just got Stolpered out on short GBP/NOK with a 2.2% loss in 3 weeks.
While hardly expecting anything quite as dramatic as the default of a Eurozone member, an epic collapse in world trade, or a central banker telling the world that "he has no Plan B as having a Plan B means admitting failure" in the next several days, there are quite a few events in the coming week. Here is Goldman's summary of what to expect in the next 168 hours.
Two days ago we noted that foreigners are selling US paper at a record pace, whether to raise capital in a locked out liquidity environment like French banks, or to make a politicial statement, like China. Today we get the first confirmation to this from Norway's Sovereign Wealth fund, best known for its prediction that it would buy and hold Greek bonds in perpetuity back in September 2010. Just recall: "Norway has taken the view that [Greek bonds] will not [default]. The Greek holdings are particularly interesting because the consensus in the market is that they will at some point restructure or default." Well, about a year later it is now official that the best the Norway SWF can hope for is a 50% recovery. So what does it do? It proceeds to dump US paper. Mortgage Backed Securities first. Because if it announced that a sovereign wealth fund instead of buying into the biggest ponzi ever, we finally defecting from it, then all bets would be of. Bloomberg reports: "Norway’s $570 billion sovereign wealth fund sold all its holdings in U.S. mortgage-backed securities as part of a shift of its fixed-income portfolio.“We’ve reduced our holdings of mortgage-backed securities,” he said. “MBS has been taken out of our internal policy benchmark. This means that we don’t have mortgage-backed securities issued by Freddie Mac and Fannie Mae any longer." The stated reason for the dump: prepayment risk: "The debt was sold primarily because of the refinancing risk, he said. In the U.S., when a borrower refinances a mortgage it can cut short the maturity of the bond backed by the loan and reduce the expected interest over time, so-called prepayment risk." The real reason? Why shoring up capital of course. "The fund held 36 billion kroner ($6.6 billion) in bonds from Fannie Mae at the end of the second quarter and 11.5 billion kroner from Freddie Mac at the start of the year." And with the Fed telling us that almost $100 billion in US bonds and MBS having been sold in the past two months, one can be absolutely certain that i) it is not just MBS and ii) it is not just Norway.
The Eurozone crisis will remain on top of the agenda with a Monday conference call scheduled between the Greek Finance minister and the Troika to assess if the conditions have been met for the disbursement of the next tranche. Also on Monday, Chancellor Merkel will face the press after weak regional election results in Berlin. Likely, the Eurozone crisis will be on the agenda. The developments in Greece will remain important throughout the week, with speeches by German Finance Minister Schaeuble and the ECB's Mr. Stark potentially important at the end of the week, during the IMF/Worldbank/G20 meetings, which start at the end of the week. At the Washington gathering we expect plenty of public comments on the Eurozone crisis by global policymakers, giving the currency market an opportunity to move on every headline. The other main event this week is the FOMC meeting, where Goldman expects “Operation Twist”. Some investors have started to wonder if there will be a QE3 surprise with additional asset purchases.
Quebec's hedge funds are about to get a boost from some big players...
Highlights from the just released speech by Philly Fed hawk Charles Plosser:
- Fed's Plosser says would want to make explicit the Fed's commitment to a numerical inflation objective
- Says important to communicate a systemic plan that describes where Fed is going, how it will get there
- Says his proposed strategy would tie pace of asset sales to size of interest rate increases
- Says his preferred exit strategy would raise rates, shrink balance sheet concurrently
- Says failure to exit in timely manner will have serious consequences on inflation, economic stability in future
- Says monetary policy will have to reverse course in the not too distant future
- Says consumer spending continues to expand at reasonably robust rate
- Says US economy seems to be on much firmer foundation
- Says labor market conditions are improving
In other words, an attempt to return confusion over the fate of QE3. As for the Fed existing anything.... good luck. As part of his exit proposals, Plosser proposes two exit plans (12 and 18 months) both of which sees a dramatic reduction in reserves, a hike in IOER, and asset sell offs. Should the Fed indeed proceed to do this, the market will prolapse.
In a move to combat rising inflation, Norway's Government Pension Fund Global, valued at $548 billion at the end of last year, is slashing its bond holdings and shifting to real estate and infrastructure...
While nobody has any idea just what lies in store in the coming week which is expected to be abnormally volatile, here is a summary of the key economic events from Goldman's FX desk. "It all came at once last week with the major drivers of market price action rolling across the newswires on Friday. Front, back and centre stage was dominated by the still unfolding tragedy in Japan. First and foremost our thoughts are with those affected by the situation. In terms of asset markets, it is tough to draw concrete conclusions until we have a greater handle on the monetary cost of the disaster which is likely to run into trillions of Yen. There are also many potentially offsetting economic forces at work after a natural disaster, which we will try to assess in coming days and weeks."
The Eurozone summit arguably produced a positive surprise in that steps have been taken to a final political deal at the European council meeting of 24/25 March...The week ahead will continue to focus on developments in Japan and the Middle East and any further political commentary associated with the European summit. The BoJ has shortened its monetary policy meeting to one day on Monday. In addition to pledges to provide ongoing liquidity and the maintenance of financial stability, the BoJ may decide to extend the QE proposals from September in order to shore up confidence
The week ahead is relatively light on the data front with the US only reporting on the trade balance (likely wider), claims and consumer confidence. However, there will be a slew of speeches and testimonies from Bernanke and regional Fed Presidents, in particular early in the week. Outside the US the key policy event this week will be the BOK meeting with consensus now expecting a hike, whereas GS still thinks on balance that rates will remain on hold. The other important development to watch is China's return from a week-long holiday on Wednesday. With inflation pressures rising and the Government increasingly vocal in promising price stability further tightening measures are possible. China money supply and credit numbers will be particularly interesting in that context. Outside the macro data, the rapid sell-off in US rates and the impact on interest rate differentials will likely remain the most watched development for FX investors in the upcoming week. Finally, developments in the Middle East continue to deserve some attention, given the fluidity of the political situation and the potential spill-over into commodity markets.
The Senate votes on the fiscal package Monday at 3:00 pm. Assuming it passes, the House of Representatives is likely to vote later in the week. Congress plans to adjourn for the year December 17. Fiscal policy remains very important for the medium term USD outlook due to the building tension between stronger demand and potentially widening twin deficits. There will also be some focus on the Philly Fed and Empire surveys next week, which sent a very divergent message on US manufacturing activity last month. Also next week, there will be $24 worth of Fed-given liquidity courtesy of 4 POMOs on every day except Tuesday.
Below is Erik Nielsen's latest dose of European permabullishness. At this point it is pretty much pointless to keep track of who is who at Goldman - the last attempt to reignite "The Ponz" is going gull blast, and every single person has forsaken their credibility in order to pitch the propaganda line. How Goldman's strategists pretend to be even remotely relevant any more is a mystery to anyone. The bottom line, and cutting through all the bullshit, is that Germany will do almost everything to keep the Euro, and thus import the periphery's monetary weakness, keeping its exports cheep, absent a fiscal union, no matter what the petrified bureaucrat Schauble says. Luckily Angela Merkel gets it... for now. Which is why all those who were expecting the WSJ interview with the German finance minister to push the EURUSD higher in Monday trading are in for a disappointment judging by the early action in the pair.