A very strong inflation data point out of Canada pushed BoC inflation expectations higher and CAD stronger across the board. Should this be the focus or should the oil sell-off be of more concern for the currency? Also, will EURUSD complete a comeback or find resistance again soon?
RBA Minutes
The RBA minutes showed the central bank making relatively balanced comments on the Australian economy. It expected a pick-up in commercial property construction, noted a positive outlook for the Australia labor market and noted positive business investment. On the negative side, it suggested that there was still uncertainty in the wake of the Japanese earthquake, that housing and consumption are weak, and that Q1 growth would be “held down” more than originally expected after the violent weather earlier this year. It indicated that its view of current RBA rates was “appropriate”. All in all, this appeared slightly dovish and several bps were taken out of forward expectations for the RBA as the AUD weakened slightly.
The RBA minutes showed the central bank making relatively balanced comments on the Australian economy. It expected a pick-up in commercial property construction, noted a positive outlook for the Australia labor market and noted positive business investment. On the negative side, it suggested that there was still uncertainty in the wake of the Japanese earthquake, that housing and consumption are weak, and that Q1 growth would be “held down” more than originally expected after the violent weather earlier this year. It indicated that its view of current RBA rates was “appropriate”. All in all, this appeared slightly dovish and several bps were taken out of forward expectations for the RBA as the AUD weakened slightly.
Canada inflation
CAD had edged to the weak side over the last couple of days, first on an oil sell-off and then on yesterday’s risk swoon in the wake of the Finland election results and the S&P downgrade of the US debt outlook, but signs of a small comeback were already evident yesterday when USDCAD failed to close above the 0.9675 resistance area that it briefly broke through. Then early today we get a March CPI number out of Canada that showed both headline and core CPI vastly higher than expectations.
CAD had edged to the weak side over the last couple of days, first on an oil sell-off and then on yesterday’s risk swoon in the wake of the Finland election results and the S&P downgrade of the US debt outlook, but signs of a small comeback were already evident yesterday when USDCAD failed to close above the 0.9675 resistance area that it briefly broke through. Then early today we get a March CPI number out of Canada that showed both headline and core CPI vastly higher than expectations.
Already a popular currency because of its natural resource base, healthy economy, and lack of public fiscal challenges, the only chink in the CAD’s armor of late has been its low interest rate as the BoC is seen as reluctant to move too aggressively with the Fed still in QE mode. The BoC is justifiably worried about a hollowing out of Canada’s manufacturing economy from its strong currency. But the strong inflation report today saw BoC expectations snap sharply higher by about 10 bps (and the spread to US rates was already near the widest it had been recently in the first place) and saw CAD strengthening across the board. Those looking to stay away from the USDCAD cross might consider the relative merits of AUD and CAD: consider that the RBA seems unwilling to move much more on rates while the BoC seems to be just getting started. Indeed, AUDCAD was sharply lower in today’s trade and may have turned a corner here, as we discuss below.
Chart: AUDCAD
The Aussie has been more popular than CAD in recent weeks because of Australia’s direct exposure to Chinese commodity demand and due to the higher yield of the Australian currency, while the CAD has been capped due to the gravitational force of its neighbor to the south. But the rate spread between Australia and Canada at the short end of the curve has been drifting tighter for months now and got a further sharp tightening with the latest CPI number out of Canada. This report may have provided the starting point for a steeper sell-off for the pair.
The Aussie has been more popular than CAD in recent weeks because of Australia’s direct exposure to Chinese commodity demand and due to the higher yield of the Australian currency, while the CAD has been capped due to the gravitational force of its neighbor to the south. But the rate spread between Australia and Canada at the short end of the curve has been drifting tighter for months now and got a further sharp tightening with the latest CPI number out of Canada. This report may have provided the starting point for a steeper sell-off for the pair.
Odds and ends
Germany’s preliminary PMI’s for the month of April showed a further acceleration in the country’s manufacturing economy and adds to the incredible string of strong showings. On the negative side, the services PMI saw a bad miss and 2.4-point drop and lowest reading since last October, though still solidly in growth territory at 57.7.
Germany’s preliminary PMI’s for the month of April showed a further acceleration in the country’s manufacturing economy and adds to the incredible string of strong showings. On the negative side, the services PMI saw a bad miss and 2.4-point drop and lowest reading since last October, though still solidly in growth territory at 57.7.
Canada’s Core CPI month-on-month reading of +0.7% nearly matched the highest readings for the last 20 years of data. Past history has shown that every single one of those previous spikes has seen a mean reversion lower in the following months. In fact, in the majority of cases, the next month’s number was actually negative. Canadian numbers tend to be less smooth than those for many other countries – just a note of caution before we get too carried away with the implications of today’s inflation release.
The US housing starts and building permits data for Mar. were far stronger than expected, though still within the range of recent months. The US housing market remains a non-story as it will remain capped for many months, if not years, to come as the US transitions away from the GSE model of home loan financing and as the Fed slowly unwinds its support of the market. On top of that, there is a large inventory of homes that must be sold down.
Looking ahead
EURUSD consolidated well off its lows from yesterday, but the debt spread situation in Europe doesn’t suggest any letting up on the pressure on the Euro. The recovery in the pair may have as much to do with the strong bounce in risk appetite from its worst levels yesterday (there seems to be a Pavlovian response to every single sell-off representing an opportunity to Just Buy the Dip – shield your eyes on the next dip that fails to elicit this response), but one has to look at any Euro rally with skepticism as long as, for example, the Spain/Germany debt spread remains as wide as it has become over the last couple of days. There was a marginal tightening in that spread relative to the worst levels from yesterday, however, and this is reflected in not only the EURUSD bounce, but the strong bounce in EURCHF and EURJPY as well, which have been aided by the consolidation lower in bond markets. Stay tuned.
EURUSD consolidated well off its lows from yesterday, but the debt spread situation in Europe doesn’t suggest any letting up on the pressure on the Euro. The recovery in the pair may have as much to do with the strong bounce in risk appetite from its worst levels yesterday (there seems to be a Pavlovian response to every single sell-off representing an opportunity to Just Buy the Dip – shield your eyes on the next dip that fails to elicit this response), but one has to look at any Euro rally with skepticism as long as, for example, the Spain/Germany debt spread remains as wide as it has become over the last couple of days. There was a marginal tightening in that spread relative to the worst levels from yesterday, however, and this is reflected in not only the EURUSD bounce, but the strong bounce in EURCHF and EURJPY as well, which have been aided by the consolidation lower in bond markets. Stay tuned.
Tomorrow we have Sweden's Riksbank up with its rate decision. The bank is expected to move by another 25 bp increment to bring the rate to 1.75%. The overall outlook for risk and for the Euro are important for SEK. Tactical focus comes in the 8.90 area for EURSEK. MEanwhile, USDSEK looks like it is trying to form a base here in the 6.20/5 area. For a rally to materialize there, we would likely need a slight change of tone from the Riksbank and/or a risk sell-off as SEK tends to be a very pro-cyclical currency.
Economic Data Highlights
- China Apr. HSBC Flash Manufacturing PMI out at 51.8 vs. 51.8 in Mar.
- EuroZone Apr. Consumer Confidence out at -11.4 vs. -11 expected and -10.6 in Mar.
- Germany Apr. preliminary PMI Manufacturing out at 61.7 vs. 60.0 expected and 60.9 in Mar.
- Germany Apr. preliminary PMI Services out at 57.7 vs. 59.8 expected and 60.1 in Mar.
- EuroZone Apr. preliminary PMI Manufacturing out at 57.7 vs. 57.0 expected and 57.5 in Mar.
- EuroZone Apr. preliminary PMI Services out at 56.9 as expected and vs. 57.2 in Mar.
- EuroZone Feb. Current Account out at -7.2B vs. -5.6B in Jan.
- EuroZone Feb. Construction Output out at -0.7% MoM and +3.5% YoY vs. -4.6% YoY in Jan.
- Canada Mar. Consumer Price Index out at +1.1% MoM and +3.3% YoY vs. +0.6%/+2.8% expected, respectively and vs. +2.2% YoY in Feb.
- Canada Mar. CPI Core out at +0.7% MoM and +1.7% YoY vs. +0.2%/+1.2% expected, respectively and vs. +0.9% YoY in Feb.
- Canada Mar. Leading Indicators out at +0.8% MoM vs. +0.5% expected and +1.1% in Feb.
- Canada Feb. Wholesale Sales out at -0.6% MoM vs. -0.2% expected and +1.6% in Jan.
- US Mar. Building Permits out at 594k vs. 540k expected and 534k in Feb.
- US Mar. Housing Starts out at 549k vs. 520k expected and 512k in Feb.
Upcoming Economic Calendar Highlights (all times GMT)
- US Weekly API Crude Oil and Product Inventories (2030)
- Japan Mar. Merchandise Trade Balance (2350)
- Australia Feb. Westpac Leading Index (0030)
- China Feb. Conference Board Leading Index (0200)
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