Notes From Underground

OK, some of it is reality. Axel Weber announced today that he will be teaching at the mecca of monetarism as he heads to the hallowed halls of the University of Chicago. If only Bernanke would head to the Bundesbank, the financial world would have a respite from the bubble blowers that have resided at the helm of the FED. The ECB‘s loss will be the U of C’s gain. As usual, Herr Weber is not going quietly as he was opining how the ECB would raise rates by 75 basis points before the year has ended. The French and Sarkozy are breathing easier as the hard-money German has been sent across the pond to resharpen his “TALONS.”

The EURO failed to rally today as Weber spoke of higher rates but to paraphrase MARX (Groucho), “I may dislike your currency but I have to let it rally sometime.” Hedge funds worldwide were voicing their displeasure at a move by the European Parliament to BAN the use of naked credit default swaps (CDS) on sovereign debt instruments. Several fixed income traders have argued that a BAN on “uncovered ” CDS trading will lead to a widening of the cost of hedging risk. Hedge fund traders hinted that they would just get short the stock of banks that were heavily exposed to the DEBT OF THE PIIGS.

The problem with the European regulatory mindset is that they think a ban removes the perceived problem: Fire first and ask questions later. I would advise the to be very careful and understand that with the Deutsche Bourse “MERGER” will come European regulation. Oh CFIUS, now is the time to raise the issue of national strategic interest. I think that the European Parliament did more to aid the DOLLAR today than any discussion of interest rate differentials so it is with much interest to see if this issue gains traction. Even though the European Parliament went this route, it is certainly not a done deal as the EURO STATES can intercede and minimize its effects.

The RBNZ will announce the overnight lending rate tomorrow at 2 p.m. CST. The KIWI has been under pressure on all the crosses as the market reacted to PRIME MINISTER John Key’s call for a rate cut to help stem the negative impact of last month’s earthquake. Several analysts have predicted a 50 basis point cut to 2.5 percent, which led to downward pressure on the KIWI. The RBNZ has been known to value its independence so they may well leave rates unchanged just to thwart the political interference from Mr.Key.

If the RBNZ Governor Alan Bollard snubs the PM look for the KIWI to stage a major rally. Even if the 50 basis point cut materializes, I think the KIWI will rally afterwards for the rebuilding of the heavily damaged city of Christchurch will be a massive stimulus to what was a fairly robust economy. Remember, the day of the earthquake Fonterra Cooperative Group, the world’s largest dairy exporter, has announced it was upping its payout to New Zealand farmers because of high prices. I advise FOREX traders to be alert because so much KIWI was sold on the crosses. This week the AUSSIE/KIWI cross make 10-year highs.

Thursday morning  is the Bank of England announcement, from which I expect no change in the overnight rate or the size of the QE program presently in place. Some analysts are looking for a rate raise but in my reading of Mervyn King’s speech, I just don’t see it. The last vote was 6-3 and from the statements of MPC members, it seems that the vote will be similar. Because the STERLING is off its recent highs, there shouldn’t be any serious reaction to a status quo vote.

As a quick note. There is a story in the Financial Times about the growth of sovereign wealth funds. Last year they rose in value by 11 percent, to 3.98 TRILLION from 3.59 TRILLION. These numbers make the combined market power of all the world’s SWFs a formidable financial force. Leverage them a conservative five times and you have the potential for major market movements. Remember that the world’s banks were leveraged 30 times prior to the “BALANCE SHEET RECESSION.” Don’t let your children grow up to be traders.

Tags: Alan Bollard, Aussie/Kiwi, Axel Weber, Bank of England, Deutsche Bourse, ECB, Euro, Fed, Fonterra Cooperative Group, Groucho Marx, John Key, Kiwi, Mervyn King, monetarism, naked CDS, NYSE Euronext, PIIGS, QE, RBNZ, Sovereign Wealth Funds, Sterling, University of Chicago

This entry was posted on March 8, 2011 at 9:13 pm and is filed under Currency, ECB, Europe, New Zealand, UK. 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.