- US Q1 GDP reaction points the way for this week’s releases
Friday’s US Q1 GDP advance estimate yielded a relatively muted reaction from the markets, although it provides some pointers for the likely reaction of the USD to this week’s major releases. US Q1 GDP came posted at 2.2%q/q saar, below market expectations of 2.5%. Despite the disappointment, personal consumption outperformed coming in at 2.9%q/q vs. consensus of 2.3%. Also, the University of Michigan index of consumer sentiment rebounded strongly in the second half of the month to 76.4 from 75.7, aided by the modest decline in gasoline prices. The FX reaction saw a strong showing from the AUD, JPY and NZD, with the NZD gaining nearly 1% against the USD. Typically, all three counters would be expected to benefit from further Fed largesse, and the fact that both equities and bonds ended higher add weight to the idea that Friday’s moves reflected increased expectations of more easing to come – perhaps encouraged by Bernanke’s clear pledge that the Fed “remain(s) prepared to do more”. If such is the current market reaction to weaker US data, then we should expect a similar reaction to disappointment from either of this week’s two major US releases, the ISM on Tuesday and non-farm payrolls on Friday. While our economists are looking for a slight uptick from last month for the ISM (vs consensus for a weaker print), their outlook for the more important April payroll report is for only a 125k gain, much weaker than consensus estimate of +175k. Over the balance of the week therefore we expect that risk appetite can continue to support the AUD and the CAD; on the former, we see a 25 bp cut as the most likely outcome from tomorrow’s RBA policy decision: with markets pricing in a 30% chance of a half-point cut, we anticipate further support for the AUD from tomorrow’s meeting, especially if the RBA appears less than certain about the need for further cuts.
- Spanish GDP, Eurozone flash HICP, PMIs all important ahead of key ECB meeting
S&P’s downgrade of Spain and the weak results of the Italian auctions were seemingly ignored as EURUSD forged higher. EUR resilience in the face of such negative news may be tested on Monday with the Spanish Q1 GDP. A sharper-than expected decline in Q1 GDP (-0.5% consensus vs. BNP forecast -0.4%) should put the focus back on Spain and its fiscal
problems. Eurozone HICP flash should moderate for April to 2.5% vs. 2.7% in March on the back of the recent decline in energy prices. If inflation, in fact, does decline then we could see the ECB temper its “less dovish” talk on 3 May. The case for a cut from the ECB is building, as fiscal tightening drags on economic activity and leading indicators are slipping – this week’s PMIs will be closely watching in this regard. Our economists do not expect a cut from the ECB on Thursday; and financial conditions would have to deteriorate significantly to prompt the reactivation of the SMP; as such any FX impact will likely have to come from ECB Chief Draghi’s post-meeting comments. Also of interest this week will be the one and only French Presidential debate on Wednesday ahead of the weekend election. Assuming Sarkozy cannot land some knock-out blow to restore his chances, focus will be on the extent to which Francois Hollande, with a large proportion of the French electorate tuning in, reaffirms his pledge to renegotiate the fiscal pact.
- USDJPY once again at key levels despite BoJ action
Market reaction to the further measures from the BoJ presents the authorities with yet another headache. A return to the previous 76-80 trading range would highlight the impotence of the BoJ to affect the exchange rate in the current environment where risk appetite is curbed and where numerous zero-cost alternatives to JPY funding exist. The implication would thus be that the BoJ’s argument is correct: Japan’s current predicament cannot be solved by liquidity and requires significant fiscal policy changes and structural reforms. But political developments suggest little near-term prospect of progress in these areas; in the meantime the authorities may see little alternative but to revert to a more active role in currency markets. We anticipate a ratcheting up of verbal intervention on a break of 80 – where option barriers and retail stops are said to cluster – and would not rule out more forceful action on a break of 79.
BNP Paribas