US dollar remains under pressure, as rating agencies may start to put its AAA rating into question. Also the return of liquidity (recovery story) and some nervousness about inflation down the road are pressuring the greenback against most other currencies. S&P revised outlook for UK rating to negative from neutral, highlighting the risk of recent policy initiatives for the creditworthiness of the UK (and other countries). Government bond markets had terrible week and investors are putting pressure on policymakers to top up quantitative monetary policy. US equities ended last Friday unchanged, but also couldn’t take out the previous high despite an attempt on Wednesday. The fate of the nearby key resistance of 943/980 (S&P) will remain the key issue for all markets also this week. Crude oil remains firm ($ 61.30) near highs on dollar weakness. North Korean Nuclear test causes regional upheaval, but Asian stocks erase initial losses. BoJ sounding slightly more upbeat about the economy, while also announcing it will accept bonds (at least AA) from foreign governments as collateral in its money market operations US and UK markets are closed today, but May IFO business sentiment release will attract attention of markets Markets At the end of last week, government bonds had a very difficult time, as increasing signs of improvement in the real economy and the financial markets were exacerbated by the warning of S&P that the UK may lose its AAA-status. In the euro zone, the advance reading of the PMI surveys showed a stronger than expected rebound in May. Although the headline figures are still well below the 50 level, the third monthly rise strengthens the underlying consensus that the economic downturn is slowing following the sharp contraction in Q4 and Q1. At the same time, the fall in several financial risk premia indicates that risk appetite is returning. The downgrade of the UK’s rating outlook to negative however raised concerns about the impact of the fiscal stimulus plans on the outlook for public finances and sent longer-term yields sharply higher. In the euro zone and the US, 10- and 30-year yields are now at their highest level since last November. The increase in yields is mainly driven by a rise in inflation expectations, which put some doubts on the effectiveness of the central bank’s quantitative easing policies to keep longer-term yields at low levels. In the UK, longerterm yields shot higher too, but were still below the January highs. In the euro zone, a confirmation of the break below 120.37 in the Bund would turn the longer-term technical picture bearish. In the US, a similar level is seen at 119-06 in the T-Note future. The US dollar is the main victim of the last few days. The greenback was already on the defensive early last week and traded slightly below key support levels, but the real break occurred in the second halve of the week. On Thursday, S&P revised the outlook of the UK rating to negative from stable suggesting that the UK might at some point lose its AAA rating. The stellar deficit and the rapidly rising debt were the obvious reason behind the decision, which was maybe unexpected, but nevertheless long overdue. The situation of the UK government finances doesn’t merit such a AAA rating. However, the markets immediately deducted that the US government finances are no better and thus concluded that the country’s AAA rating is at risk too. Bond yields rose sharply and as especially the US is dependent on Asian demand for its Treasuries, the event was highly negative for the US dollar (more than Sterling). Markets are afraid that a vicious circle may be building in which higher yields are pressuring the Fed in raising the amount of Treasuries it buys in the framework of its QE. Such an eventual expansion of Fed purchases of Treasuries would ever more resemble to direct government financing and lessen the Fed’s zeal to keep inflation in check. Inflation has always been considered as one possibility to lower the (real) burden of debt. Needless to say that such an eventual scenario spooks dollar investors and thus perfectly explains why the dollar has such a difficult time. While the S&P couldn’t make further headway last week, still hindered by key resistance levels, the climate globally remains relatively risk-minded. Also the collapse in Libors and in credit spreads are indications liquidity is returning to the markets. This is also weighing on the dollar that has been the great beneficiary of the disappearance of liquidity earlier in the crisis. Concluding, a number of developments are currently weighing on the dollar and the technical pictures of the Finnex dollar (trade weighted) and crosses like amongst others EUR/USD, cable and Aussi/Kiwi are dollar negative. Today, the calendar contains the German IFO indicator. Following the upward surprise in the PMI surveys last week, the risk is clearly on the upside of expectations. Trading is likely to remain thin, as the UK and US financial markets are closed.

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