Chinese data eases fears of sharp slowdown.
Europe headed towards deal on Greece says EUR and risk to remain bid – but beware disappointment: play though options.
US retail sales to reaffirm slowdown in economy, but will not support USD today.
Risk is bid as today’s Chinese figures allay some of the fears of a sharper slowdown and the knock-on effects for global growth. Retail sales and IP came in around consensus estimates, but there had been fears of a disappointment in IP in particular. Inflation was higher at 5.5% but again in line with expectations – and lower than some fears for a blowout number. Another Chinese rate hike is still likely – with reports suggesting it might come as early as this month – but this is widely anticipated by the market and should not have too much impact. Recent weak US data in an environment of concern over global growth has led to further risk aversion, particularly with the Fed downplaying the prospects for QE3. But the more positive tone from China means that a weaker US retail sales print later today is likely to lead to pressure on the USD.
Adding to support for risk and to pressure on the USD may be some positive developments out of the Eurozone. Eurozone Finance Ministers will meet in Brussels this afternoon in an attempt to bridge the gap between the ECB and Eurozone politicians on Greece ahead of the main EcoFin on June 20. Signs are emerging that the momentum is swinging the ECB’s way, with Olli Rehn saying that an agreement on the basis of the Vienna initiative – which he says would under no circumstances would lead to a credit default – is in the pipeline. This would see banks ‘volunteering’ to rollover maturing Greek debt as part of a new bailout package, easing concerns of a Eurozone financial crisis in the medium term, and buying some badly needed time for a Eurozone recovery. There remains considerable uncertainty about how investors could be persuaded, and indeed whether Germany is ultimately willing to drop its proposal for a bond swap. But if a plan centred around a voluntary rollover is indeed is the outcome of today’s meeting, then EUR will rally hard. Conversely though, with time running out before Monday’s key meeting, failure to agree will put the single currency under further pressure: we continue to suggest playing for a higher EURUSD through still-cheap, short-dated options (see today’s Market Focus for more).
With risk on a more positive footing, and with many of the shorts washed out over the past few days, EURSEK looks ripe for a correction. Indeed SEK has the potential to be the day’s best performer if CPI fails to disappoint. We match consensus at 3.4% y/y on the headline rate and 1.8% for underlying inflation, but amid market concerns that it might come in on the weak side, a consensus print should be enough to send EURSEK lower; we would put a stop at 9.14 above yesterday’s high. Meanwhile UK CPI is expected to come in at 4.5% y/y and 0.2% m/m. April CPI jumped 1% m/m and 4.5% y/y. Last month’s uptick was mostly driven by core inflation, but we see a partial unwind of last month’s Easter-related jump in core to be offset by stronger food and energy inflation. If CPI fails to come in above last month’s 4.5% reading and retail sales are weaker than forecast, GBP will struggle to keep pace; while EURGBP has room to the upside, GBPSEK shorts look even more attractive.
BNP Paribas
Corporate & Investment Banking