Risk-Aversion Dominates But Currency Markets Steady: April 11, 2012

Risk-aversion continues to dominate markets on Spain's situation even though that's not being reflected in the currency markets. Spain's 10-year benchmark yield is pressing 6% and would like continue to rise today. Prime minister Rajoy said that there a "a good part of Spain' future is at stake" and "the problem is that the markets can lend or decide not to lend."

Economic minister Luis de Guindos noted that recession could be deeper than expected and Spain's central bank chief warned that banks may need additional capital if the recession deepens. While it's being ruled out by Spanish officials, markets are worrying that Spain will eventually need to follow Greece, Ireland and Portugal to seek a bailout.

And the bigger problem is that the magical power of ECB's three-year LTRO seemed to be fading quickly as Italy yield is also back at around 5.7% level. Two rounds of ultra-long three-year LTRO was initiated back in December and February to offer banks with cheap loans at 1% rate. 523 banks tapped into EUR 489b in the first round and around 800 tapped into EUR 529b in the second round. But now, Italian and Spanish yield are back above pre-LTRO levels and there are talk that we could see LTRO 3 from ECB before QE3 from Fed.

There are reports that IMF is poised to lower long-term forecast of China's current account surplus sharply in its World Economic Outlook to be published later this month. It's reported that a reduction from 7% of GDP to 5% was discussed and in that case, would markedly weaken the case that the Chinese yuan is undervalued. Back in 2007, China's CA surplus reached as high as 10.1% and formed the basis of argument that yuan was "substantially undervalued". However, the CA surplus then dropped deeply in the following years and was just at 2.8% of GDP in 2011.

On the data front, UK BRC sales monitor rose 1.3% yoy in March. Japan machine orders rose 4.8% mom in February. Australia Westpac consumer sentiment dropped -1.6% in April. Looking ahead, Canada housing starts are expected to be steady at 202k in March. US import price is expected to rise 0.9% mom in March. Fed will also release the Beige Book economic report.