Commodity rally lifts FX markets
US sovereign CDS worth watching as it may indicate further USD weakness
UK retail sales to come in stronger, but this is the result of distortions, not a longer trend. We expect GBP to remain under pressure in the medium term.
Commodities are rebounding, dragging the USD lower against most G10 currencies. WTI rose more than 2% in New York as the latest EIA data showed that US crude inventories fell 15,000 barrels last week instead of rising 1mn barrels as had been expected. In addition, a worsening drought in Europe and wet weather in the US sparked concern over the supply of wheat. Industrial and precious metals have also gained, raising optimism about a broader return to risk-taking.
While commodities may be the major driver, it is also worth noting the overnight 5bp rise in US CDS. This is on the back of concerns over the US debt ceiling negotiations, with House Majority Leader Eric Cantor echoing a weekend opinion piece in the WSJ that the inconvenience of a few days delay in coupon payments would be worth it if the delay resulted in a credible agreement on a return to fiscal balance over the long run. While the logic of this argument is certainly attractive, the prospect of a true government shutdown were negotiations to drag on beyond the August 2 deadline will not support confidence in the US economy. And certainly it seems fair to say that few in the Treasury markets would like to be part of such an experiment. A similar CDS uptick around April 18th when there was talk of a partial government shutdown saw DXY slide from 75.80 to 73.70 over a 3 day period. DXY threatens to break the 50-dma support at 75.13.
EURUSD has gained some support from ECB commentary stressing the need to remove policy accommodation and to avoid a restructuring of peripheral debt. Also a strong Spanish auction today should allay any immediate peripheral contagion concerns. The EU/IMF mission to Greece is due to report on progress by the end of the month, but is unlikely to withhold the next tranche of aid. From the IMF side, Strauss-Kahn’s resignation means that the decision would have to be driven by Lipsky, who is very much in a caretaker role ahead of his August departure. The opinion out of European capitals is increasingly opposed to any sort of restructuring or reprofiling. The next major milestone on the Eurozone debt crisis will be the EU FinMin meetings on June 20th and 24th; and to a lesser extent the release of the stress tests next month; both are a long way off. In the meantime EURUSD can build on its mid-week recovery.
Japanese GDP numbers came in much worse than expected at -3.7% annualised vs. consensus of -1.9%; and March capacity utilisation fell by a record 21.5% MoM. The data raises the stakes for tomorrow’s BoJ announcement: while the market was not expecting more easing measures from the BoJ, the data may be enough to tip the balance in favour of the previously-proposed limited increase in asset purchases. While the BoJ is unlikely to be aggressive enough to spark a significant move in USDJPY, any additional accomodation could be the trigger for a more meaningful rebound in risk in FX markets, sending yen crosses higher. AUDJPY is the obvious vehicle.
GBP suffered on the back of the BoE Minutes and latest labour market figures. The BoE remains concerned about the downside risks to consumer spending given fiscal consolidation and from what is expected to be persistently high unemployment. Thus, retail sales numbers later today will be important. While we expect it to be on the strong side, it is necessary to highlight that this is a result of a series of distortions including record warm weather and holidays. The retail sales trend is suffering from squeezed real incomes and declining confidence. EURGBP has traded higher independent of EURUSD, but we favour maintaining tactical short positions here.
BNP Paribas
Corporate & Investment Banking