Political Theatre Isn't Over, So Risk On - I expect that Friday's last minute deal between US Congressional leaders and President Barack Obama to avert a government shutdown will give the USD a limited bounce but it will not change the downtrend that the USD is currently in. Why? - because Friday's deadline was one of many to come before the US Treasury will reach its statutory debt limit by about May 16, at which point the US government will no longer be able to issue debt. Also, it is not the US budget but US monetary policy which is the largest negative factor for the USD. Last week's move in the markets was amplified by a shift from risk aversion to the risk on trade (Yen & USD to AUD & CAD) and a shift from low yielding currencies to high yielding currencies (Yen & USD to AUD & Euro) all driven by relative interest rate rises in response to inflation. This trend should continue this week. Back to the markets, last night's 6.6-magnitude earthquake in Japan caused the Yen to rally across the board. The media will tell you that the reason for the Yen's rally is on speculation that insurance companies would need to repatriate offshore investments to help pay for damages. However, with data from the Commodity and Futures Trading Commission showing speculators went net short on the Yen for the first time in six weeks and by the biggest margin since May 2010, I would say that the earthquake was just an excuse to take profits as the trade was starting to get overcrowded. In Europe, both the Euro and GBP remain well bid, supported by interest rate differentials after last week's 25 basis point hike by the European Central Bank and increased probability that the Bank of England may raise rates as early as May. In China, the first quarterly trade deficit in seven years is sure to demonstrate to the world that China's currency policy is appropriate just ahead of possible criticism at the next G20 meeting. In fact, the People's Bank of China has set the exchange rate to its sixth record high in as many trading days. In Canada, the CAD was little changed as the market is reluctant to push it higher ahead of tomorrow's interest rate announcement from the Bank of Canada. The BOC is not expected to raise interest rates but the market but will be looking to its accompanying statement for its take on the economy and the impact of a rapidly rising CAD.
Here are the interbank mid-market rates at the time of posting:
EUR/USD 1.4454 USD/CHF 0.9085
GBP/USD 1.6397 USD/CAD 0.9575
AUD/USD 1.0552 EUR/CAD 1.3842
NZD/USD 0.7839 GBP/CAD 1.5704
USD/JPY 84.61 USD/MXN 11.7483
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