NOK Surges
The NOK was the star performer overnight as a raft of activity data pointed to a strong rebound in general economic conditions. Retail sales and PMI figures surprised massively to the upside, and markets are left scratching heads as to why Norges Bank painted such a bleak outlook on the economy when they surprisingly cut rates in March. The currency rallied against all of G10, though in isolation this should probably not say too much about wider conditions across Europe as the outlook remains problematic, especially with governments still trying to come up with the cuts to reassure markets that the necessary austerity targets will be hit. However, given smaller, high-beta economies’ performance are often derivative products of their larger neighbors, the ability of the likes of Sweden, Norway and Switzerland to ‘hold the line’ is a sign that Europe should manage to defy pessimistic expectations, though much of this depends on the goodwill of potential bond buyers, and some unease appears to be creeping back in. Overnight Eurozone finance ministers remain locked in discussions over the next steps for the Eurozone’s sovereign debt crisis, and the firewall increase is still on the agenda, but reports suggest that the upcoming risks in Greece, both short- and longer-term, are also in the spotlight. Despite repeated bailouts and injections, there is still no guarantee that the country is on a sustainable footing and there will be even greater policy implementation risk in the coming months as elections are due. Otherwise, the focus will return to the US and key price data in the form of core PCE is due. The Fed has gone to great lengths to reassure the general public that balance sheet expansion and higher energy prices so far are not spilling over into core inflation, which obviates the need to talk about early normalization, yet signs of dissent within the FRB are coming through. Philly Fed President Plosser, a known hawk, attempted to draw such a link yesterday and even Fed Chairman Bernanke acknowledged that the Fed will need to step back at some point, though everything is data-dependent and unemployment is still far too high for his own comfort. Overnight EURUSD traded 1.3298-1.3376 and USDJPY 81.84-82.50.
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