- Chinese inflation may come in higher than expectations, but IP will be important in indicating a slowdown
- We still like short EURCHF as the divergence of opinions over Greece lingers on
- US retail sales will likely reaffirm slowdown in economy
Despite a light calendar on the data front, EUR and AUD managed a comeback by the end of the US trading day. The rally was largely driven by short covering. Gold and oil were under pressure while equities managed to just close on a positive note. While Monday was a quiet day for data, Tuesday brings a slew of potentially market moving data.
This morning, China’s May inflation is expected to push higher with consensus looking for 5.5%, but real consensus is likely to be much above that. Earlier reports have suggested inflation would come in higher, including a government researcher who said that China’s inflation rate may accelerate more than 6% y/y in June. He also added that taming inflation would remain the priority in the coming months; thus, we continue to expect a hike from the PBoC in June. Also with all this worry of a China slowdown, industrial production will either alleviate or add to that concern. We expect industrial production to come in much in line with expectations, but a number less than the consensus of 13.1% would augment concerns about the second largest economy. In that case, AUD would be most vulnerable; 1.05 stands as a key level for AUDUSD.
The stand-off between the ECB and Eurozone politicians lingers on as diverging opinions continue to hit the headlines. The Dutch FinMin reiterated the Dutch government’s stance that the private sector must offer a substantial contribution if the Dutch government were to agree to new aid. Meanwhile, Trichet said that the EU must avoid action that would trigger a credit event. EURUSD will continue to be steered by the headlines. Later today, the Eurozone FinMins will meet in Brussels to discuss Greece ahead of the June 20 meeting. We still see the most likely outcome as a market-friendly and EUR-supportive bailout with minimal impact on private holders of peripheral debt. Thus considering the Eurozone situation in isolation, we favour a EURUSD rebound over the coming week. But with so much uncertainty on Greece, we suggest playing this view through still-cheap, short-dated options. We also expect EURCHF sub-1.20 especially if peripheral CDS push to new highs.
Meanwhile UK CPI is expected to come in at 4.5% y/y and 0.2% m/m. April CPI jumped 1% m/m and 4.5% y/y. Last month’s uptick was mostly driven by core inflation, but we see a partial unwind of last month’s Easter-related jump in core to be offset by stronger food and energy inflation. However, if CPI fails to come in above last month’s 4.5% reading and retail sales are weaker than forecast, EURGBP may struggle to go lower and GBPUSD may revisit the recent low around the 1.6050 area.
Retail sales data out of the US today will likely echo the recent data soft patch, but with the Fed discouraging talk of further QE, the dynamic whereby weak US data means more USD liquidity, and by extension a weaker USD, is unlikely to hold. Ultimately the direction of risk may revolve around the ability of the S&P500 to hold the key 1250 level; our constructive view on commodity FX is being threatened.
BNP Paribas
Corporate & Investment Banking