Notes From Underground

The Bank of Canada left interest rates steady as the arm that directs the curling stone. The statement released raised the issue of the continued low level of U.S. demand and the continued strength of the LOONIE acting as drags on the economy. The Canadian Dollar strengthened though as some traders thought that the removal of the line, “retains considerable flexibility,” meant that the BOC would be quicker than the FED to raise rates.

We don’t argue with market price action but we found this rationale devoid of substance. We have been bullish of the LOONIE based on its sound fundamentals and continue to be so, but we are skeptical of any rate movement on the part of the BOC as long as the currency remains strong. The strength of the Canadian currency was more about the general selling of the U.S. Dollar as some profits were booked. There is no question that Europe is being called into question but before U.S. Dollar exuberance takes hold, traders and investors have to rethink “buy the DOLLAR at any cost” outlook. While the U.S. growth story may be better than Europe, it is not without its warts. The credit crisis in the U.S. is far from over and the Obama administration can’t be happy about the safe haven status of the DOLLAR putting a dent in the export sector.

A Reuters story reported that the FDIC is planning to sell $1.8 billion of guaranteed ABS, the residential mortgage assets of failed banks seized by the FDIC. Barclays Capital will bring the paper to market, and some credit people believe this will help  unlock the dormant securitization market. The FDIC bond will be priced at a discount to Fannie and Freddie, but because it has some guarantee, the bond will be a premium to non-guaranteed paper. This connotes another way the government is getting ready to deal with the MBS market after the March 31 deadline for the FED. We advise all market participants to be aware of this for a poor result would be a problem for the FED and others going forward.

Tonight there is word that the AIG/PRU deal announced over the weekend is under severe stress, as PRU shareholders are not overwhelmed by the repercussions of this acquisition. PRU’s stock already dropped 20% this week, which makes the details of the merger murkier. The British pound is rallying off its recent lows as there is talk that the currency component is already fully hedged and if the deal fails will have to be unwound. We can’t confirm or deny this news but with the preponderance of short POUND positions, it will not take much to shake the weakest shorts. The pundits have been talking about $1.35 price objective but that we leave to others.

The interesting fact is that the British pound has been weakening even against the EURO. While talking heads talk, they overstate the British problems for at least the British exports get a boost from a weakened currency, which is something that the sick men of Europe (PIIGS) cannot avail themselves. The recent EURO/POUND rally, from .8650 to .9150, is not something to be taken lightly. The British industrial sector competes directly with the European peripherals for markets, so the recent pound weakness is addinng to the woes of Europe. The advantage of having ones’ own currency to trash cannot be overestimated (just ask the Eurocrats in Athens). This story will be on our radar and with all the British data being released tomorrow, the pound should be more than interesting.

Tags: AIG, BOC, Dollar, Euro, Fed, Loonie, Pound, Pru

This entry was posted on March 2, 2010 at 9:34 pm and is filed under Currency. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.