- Risk on momentum stays course with equities rallying and USD weakening
- Headlines out of Europe will continue to steer EUR until there is a conclusive resolution on Greece
- May US CPI is likely to ease; downside surprise can drag US treasury yields and USDJPY lower
The risk-on momentum triggered by Chinese data allayed fears of a sharper slowdown in China resumed throughout the day. Equities rallied with the S&P closing 1.25% higher on the day, after a stretch of lackluster performances. USD remained an underperformer against all G10 currencies except the safe havens, CHF and JPY. But the relief from the second largest economy left AUD the G10 outperformer against USD. However, this is unlikely to be the start of a resumed risk-on trend since Greek issues remain unresolved.
The EU FinMin meeting on Tuesday failed to offer further clarity on whether or not Greece was closer to being resolved. In fact, The Luxembourg FinMin said that an agreement on a Greek package may be delayed to July. This comes after headlines suggested that big differences between the ECB and Germany remain, and there was a long way to go on a Greek deal. This likely negates the positive sentiment from the earlier commented from Olli Rehn that an agreement on the basis of the Vienna initiative — which he feels would not lead to a credit default — is in the pipeline. Such a mix of headlines will likely keep the markets choppy as private sector participation remains a key point of contention. In our view, one has to allow for potential uncertainty about how investors could be persuaded, and indeed whether Germany is ultimately willing to drop its proposal for a bond swap. While EUR will likely be steered by headlines on Greece, we continue to opt being long EURUSD gamma, and have started to wonder if the super intense CHF bid of the past two months at least retraces in the next few weeks.
US retail sales surprised to the upside contracting 0.2%m/m vs. the expected contraction of 0.5%. The numbers reaffirm the weakness in consumer spending as inflation has sapped consumers’ purchasing power. As such, US CPI is expected to ease, rising 0.1%m/m (in line with consensus) vs. 0.4%m/m in April. Food and energy price pressures are still likely to feed through, but at a slower pace, and core prices should maintain a slow momentum. This should offer some relief to consumers, and eventually, support consumer spending. Any downside surprise in CPI is likely to push US Treasury yields lower and USDJPY with it.
Meanwhile, labour market data out of the UK are expected to show some signs of improvement. We expect UK jobless claims change to come in at 6k this month vs. 12.5k last month. Consensus is looking for 6.5k; nevertheless, the market will need a very strong number for GBP to rally hard. Optimism on the UK economy is waning further with still high UK CPI print (despite a moderating PPI), recently overextended and dovish BoE, and significant decline in house prices (RICS overnight). GBP remains vulnerable to further weakness on the cross. Both GBPAUD and EURGBP broke below the 50-dma support of 0.8811 and 1.5365, respectively, suggesting further downside is likely.
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BNP Paribas
Corporate & Investment Banking