Risk on from Chinese figures is unlikely to turn into something more lasting while Greece remains unresolved.
May US CPI is likely to ease; downside surprise can drag US treasury yields and USDJPY lower.
AUD to continue outperformace as RBA Stevens reignites hopes for an early rate hike
Risk-on momentum continued in New York: equities rallied with the S&P closing 1.25% higher on the day, and the USD remained an underperformer against all but CHF and JPY. But yesterday’s move was driven by Chinese data seen already in Asia and the momentum has waned. With Greek issues still unresolved, this is unlikely to be the start of a resumption of the risk-on trend.
Yesterday’s EU FinMin meeting failed to offer further clarity on a Greece resolution. The FinMins will now meet Sunday ahead of the main EcoFin meeting on Monday. There is apparently still a large gulf to bridge between the ECB and those caling for a more meaningful private investor participation. Luxembourg FinMin Frieden said that an agreement on a Greek package may be delayed to July. This negates yesterday’s positive sentiment on Olli Rehn’s comment of a likely deal along the lines of the Vienna initiative, but EURUSD has, as yet, failed to fully retrace yesterday’s gains. Note also that Moody’s has placed French banks on review for a possible downgrade. The bias is clearly to the downside for EURUSD today. While EUR will continue to be buffeted by headlines on Greece, we continue to like being long EURUSD gamma.
But any USD rebound on the day is likely to be limited. We expect US CPI to ease, rising 0.1%m/m (in line with consensus) vs. 0.4%m/m in April. Food and energy price pressures are still likely to feed through, but at a slower pace, and core prices should maintain a slow momentum. This should offer some relief to consumers, and eventually, support consumer spending. Any downside surprise in CPI is likely to push US Treasury yields lower and USDJPY with it.
AUDNZD continues to rally. While aftershocks continue in New Zealand, the RBA’s Stevens said that even a Chinese slowdown is unlikely to derail the Australian economy given the structural shift in demand for commodities.While the bullish tone on the long-term prospects for the economy should come as no surprise, Stevens also came across as more hawkish that the recent RBA Statement. He reiterated that a rate hike is likely at some point; and stressed the importance of the July release of Q2 inflation figures for monetary policy. We remain constructive on commodity currencies even as risk appetite remains subdued.
Meanwhile, labour market data out of the UK are expected to show some signs of improvement. We expect UK jobless claims change to come in at 6k this month vs. 12.5k last month; consensus is looking for 6.5k. But the market will need a very strong number for GBP to rally hard. Optimism on the UK economy is waning further with still high UK CPI print (despite a moderating PPI), recently overextended and dovish BoE, and significant decline in house prices. GBP remains vulnerable to further weakness on the crosses. GBPAUD and EURGBP broke the 50-dma of 0.8811 and 1.5365, respectively, suggesting further Sterling weakness.
BNP Paribas
Corporate & Investment Banking