- USD reverses course during the NY trading day
The New York trading session saw the USD fall against all G10 currencies except the NZD (undermined by comments from PM Key), but the S&P 500 barely budged to close flat. The EUR dipped briefly below 1.30, but surged back above 1.31 with leveraged stops cited as the main driver. Better-than-expected US retail sales and improved Citibank revenues may have contributed to a shift in sentiment, but it may simply have been a case of a market that got itself too short in the face of – once again – EUR resilience. Certainly there was little justification for a EUR rebound from other asset markets, with Spanish yields closing above 6% and the Eurostoxx Bank index continuing its remarkable slide – now almost 25% lower over the last four weeks. The TIC flows data, too, failed to support the USD, even though total TIC flows were larger than expected (USD107bn vs. USD30bn). The data indicated that the pace of purchases from official buyers has continued to increase, further corroborating other evidence that FX reserves have, in fact, increased in Q1 with reserve managers accumulating the USD. Eurozone concerns – Spain in particular – remain the focal point for FX markets, and our view is that spreads will have to widen further before we see the ECB buying via the SMP. The EUR is likely to remain under pressure given the events this week; Spanish T-bill auctions later today will provide the warm-up for the more crucial test of bond auctions on Thursday. Meanwhile, ahead of the G20/IMF meetings on Friday, Japan confirmed its intention to contribute USD 60bn to the IMF funding drive – even as South Korea suggested that a deal this week might prove elusive.
- Data calendar includes ZEW Survey, EZ CPI, UK CPI, US housing starts and IP
Events aside, data flow out of the Eurozone today will be of importance to the common currency. For one, the ZEW Economic Sentiment is expected to show deterioration in the assessment of current conditions because of the weakness in the stock market and the disappointing hard data releases over the survey period. Also, the final release of Eurozone
inflation should confirm the flash estimate. With core inflation continuing to moderate, the ECB may be more likely to scale back its less dovish tone relayed at the last meeting. Ironically, this may support the EUR as it would indicate that the ECB will be on hold for some time, which is what peripheral Europe needs. UK March CPI is likely to see annual inflation rise to 3.6% y/y, due to higher petrol and shop prices. With inflation higher and retail sales likely to show signs of improvement on Thursday, it will make it harder for MPC members to take a confidently bearish view heading into the May MPC meeting. Thus, we look for further outperformance of the GBP, especially against the EUR, targeting 0.81 in Q2. Finally on the data front, US industrial production and housing starts should both improve modestly with IP rising 0.2%m/m in March vs 0% in February, and housing starts increasing to 720k in March vs 698 in February. Record warm temperatures may have pulled new construction forward. Despite the expected improvement in the US data, neither will likely have a significant impact on the market as Eurozone news will remain in the driver’s seat. We remain short EURUSD, targeting 1.28.
- RBA minutes confirm focus on inflation; risk of less dovish Bank of Canada
This morning’s release of the RBA’s April minutes confirmed that next Tuesday’s CPI print will be the determinant of policy at the May meeting. Interestingly, the RBA seems to have edged lower its assessment of the labour market just ahead of last week’s much stronger jobs print. Still, a cut is almost fully priced in for May; and regardless of whether the RBA cuts next month or not, pricing of cuts further out looks to be overdone. The minutes do not convey the sort of extreme concern that would justify 95bp of cuts over the next 12 months, and as such we continue to regard dips in the AUD as buying opportunities. Today’s Bank of Canada meeting is likely to be a non-event, but given the recent upbeat comments from BoC Governor Carney that conditions in the Canadian economy have been somewhat stronger and the degree of slack less than the BoC had previously expected, there is a possibility of a less dovish statement from the BoC – and with the market not pricing any hikes over the next 12 months, the CAD could be in for a boost.
BNP Paribas