UK Construction PMI Jumps
UK data once again surprised to the upside, offering further indications that the UK economy is emerging better out of its slump than some of its neighbours. March construction PMI rose to 56.7 vs 53.4 consensus, following the strong manufacturing data yesterday. Construction only represents a small sector in the UK economy (5%) but still provides more encouraging signs for the BoE ahead of their monthly meeting this week. As the most important indicator, tomorrow’s services number will also be closely watched. After an initial jump higher, the pound reversed its gains however and we would be cautious of chasing cable higher from these levels. GBP strength should be selective and we expect a lower EURGBP but also a lower GBPUSD. Earlier, the RBA kept the cash rate unchanged at 4.25% overnight, very much in line with consensus. The rates market had 8 bp of easing priced in though in advance, and AUD jumped 20 pips immediately. The more dovish policy statement quickly put an end to the rally and AUD soon dropped 40 pips below its pre-announcement level. Growth was deemed to be “somewhat below trend” and “somewhat lower than earlier estimated”. This represents a significant shift from the “close to trend” language used previously. The rhetorical shift means the RBA may consider a rate cut in May if the Q1 inflation reading (due on April 24) is low enough. If a cut eventually materializes this would not do AUD any favours in our view. However, even with a policy rate at 4% AUD would still offer by far the most attractive carry in G10 – and in a low-volatility environment that means AUD will still be the first port of call for yield-hungry investors. The events calendar is relatively quiet today. FOMC minutes from the March 14 meeting are due, and this will provide the latest opportunity to assess policy opinion across the committee. However, thirteen of the seventeen FOMC officials have already aired their views in public since the meeting – including Fed Chair Bernanke himself – and so the scope for a market-moving surprise is limited. The April 25 meeting is now just over 3 weeks away and promises to be a far more interesting affair. At this meeting the Fed Funds target forecasts are due to be updated for the first time since they were first presented in January. This will provide an instant quantitative measure of how opinion is distributed across the committee – and just as importantly how this opinion has changed over the past three months in response to the improving economic data flow. Overnight EURUSD traded 1.3314-1.3368 and USDJPY 81.56-82.23. Equities in Europe turned lower as the US came in, but flows were generally light.
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