Will a Canadian ratings agency dictate the dollar's fate?

Although it may be tempting to see yesterday as some sort of turning point, with global equities finally reacting negatively to bad news, it's probably premature to say that the top is definitively in.   After all, while  Nikkei futures cratered more than 1000 points yesterday and US GDP was even lousier than expected, the SPX didn't even decline a percent.   Meanwhile, Eurozone banks actually closed up on the day, fueled partially by surprising earnings from perennial whipping boys DB.

Still, the day was not without points of interest.   What started as a yen rally morphed into a dollar decline, with the buck falling against just about every currency on Macro Man's screen.  This was somewhat curious, insofar as the model community is still very short of USD/JPY and there wasn't a big embedded discretionary dollar long to get flushed, either.

Perhaps the FX market was reacting as much to the GDP figure as it was to the BOJ?   After all, the number illustrated broad-based weakness and allowed fixed income to rally even more, albeit more so at the front end of the curve than the long end.

One feature of interest was the PCE deflator, the core component registering its largest quarterly rise in 5 years (at a pace above the Fed's target!)   You can back out the reading for today's monthly PCE deflator figures from the quarterly data; assuming no past revisions, it looks set to come in at 0.14% m/m and 1.6% y/y.  In other words, pretty much in line.

That dollar weakness extended into commodities was illustrative of the breadth of the move and how little demand there was for the greenback in any quarter.   Who knew that the best way to goose commodities was to quit easing policy (other than the neo-Fisherians, of course)?   Perhaps Kuroda-san watched The Godfather II recently, as the decision to do nothing was redolent of Michael Corleone's offer to Senator Geary.

In any event, GDX put in another good day, rallying nearly 4.5% and breaking to new highs.  It's nearly at the top of its Bollinger band, which could be a cause for caution, though it's spent much of the time since February pushing against then top of its (expanding) band with no notable deleterious impact on performance.

Just how realistic is continued dollar weakness, however?   After all, there is very little at all priced for June now, so the asymmetry of risk is clearly tilted towards hawkish guidance from the Federales.  Interestingly, Macro Man has heard some rumblings of previously-sidelined discretionary macro guys entertaining the notion of getting short USD/JPY at current levels.  From his perspective, that horse has already bolted, and we're likely a lot closer to the end of the downdraft than the beginning.

Curiously, the near term catalyst could come from a ratings agency in Canada.  DBRS is the only major rating agency that maintains an investment grade rating on Portugal, and they are due to complete their ratings review today.  Should they downgrade the Portugeezers to junk, that will eliminate their eligibility to participate in the ECB's PSPP program.   Although Portuguese bonds have widened somewhat versus Bunds recently, they're pretty clearly not priced for crisis.

Yet elimination from ECB purchases would surely be a crisis, and could stoke broader concerns within the Eurozone, particularly with a wave of Greek maturities approaching like a freight train and no plan in place to navigate them?   And if Europe sinks into the more again, how realistic is ongoing dollar weakness, really?

(As an aside, while the RMB fix did strengthen against the USD by the most since 2005 last night, it actually weakened against the basket.)