Forex Investment and Currency Trading

Flows have been quiet overnight with many investors in a wait and see mode until key stress test and employment information is released later in the week. As a result of the leakage of information regarding the stress test, the expectation is there that many banks will still need to raise capital. Nonetheless, the possibility for a surprise exists if the data differs from what the market is expecting. For today, most asset classes will likely range trade due to the lack of major macro news and the large rally we observed yesterday in US equities, which could soon turn positive for the year. The S&P breached the key level of 900 yesterday. Its ability to remain above this level will be another factor in determining whether this rally is sustainable. It also looks like the positive correlation between US equities and Euro strength may be returning. Overnight, the Reserve Bank of Australia held interest rates steady. In the issued statement, the bank expects to remain on hold until it sees signs of inflation. We expect the bank to remain on hold until around October.  

HIGHLIGHTS

• Australia RBA no rate cut – cash target at 3.00% - as expected.
• Euro-Zone PPI for March -0.70% m/m and -3.10% y/y - lower than expected.
• UK PMI Construction for April 38.1 - higher than expected.
• Norway PMI SA for April 39.8 - higher than expected.
• WSJ: More Banks Will Need Capital.                                     

NEWS

• WSJ: More Banks Will Need Capital. The U.S. is expected to direct about 10 of the 19 banks undergoing government stress tests to boost their capital, according to several people familiar with the matter, a move that officials hope will quell fears about the solvency of the financial sector. The exact number of banks affected remains under discussion. It could include Wells Fargo & Co., Bank of America, Citigroup Inc. and several regional banks. At one point, officials believed as many as 14 banks would need to raise more funds to create a stronger buffer against future losses, these people said, but that number has fallen in recent days. Representatives from Wells, Bank of America and Citi declined to comment.
• Fed Says U.S. Banks Expect Deepening of Loan Losses. Most U.S. banks expect loan delinquencies and losses to increase this year, a Federal Reserve report showed today before this week’s release of stress tests of the nation’s 19 largest lenders. More than 70 percent of respondents on net said bad loans will rise should the economy progress “in line with consensus forecasts,” the Fed said in a quarterly survey of banks’ senior loan officers. More firms made it tougher for consumers to get home and credit-card loans in the past three months than in the previous survey, while fewer tightened terms for businesses. The report indicates that signs of stabilization in the U.S. economy aren’t resulting in an easing in lending terms. Banks are hoarding a record $1.1 trillion of cash even after the Treasury and central bank made emergency capital injections and set up special lending programs to ensure lenders extended credit to households and businesses.
• WSJ: Nouriel Roubini: We Can’t Subsidize the Banks Forever. The results of the government’s stress tests on banks, to be released in a few days, will not mark the beginning of the end of the financial crisis. If we are to believe the leaks, the results will show that there might be a few problems at some of the regional banks and Citigroup and Bank of America may need some more capital if things get worse. But the overall message is that the sector is in pretty good shape. The stress tests’ conclusions are too optimistic about the banks’ absolute health, although their relative assessment is more precise, because consistent valuation methods were used. Still, with Thursday’s announcement of the results, it shouldn’t be a surprise when the usual suspects emerge. We fear that we are back to bailout purgatory, for lack of a better term.
• Reuters: AIG to post Q1 loss, no new bailout. American International Group Inc is expected to post a first-quarter loss on Thursday, but the embattled insurer’s results will not trigger a new capital injection from the U.S. government this time, a source familiar with the matter said on Monday. The loss in the first quarter is expected to be significantly lower than its record fourth-quarter loss of $61.7 billion, the source said, adding that there would be no new bailout announced with the results. The source declined to be named because the results haven’t been announced yet. AIG could not immediately be reached for comment.