The market overnight finally showed us that market volatility can go both ways now, as JPY crosses consolidated sharply before flying back higher again and the USD did a similar dance. GBP touched new lows versus the Euro on record drop in Retail Sales and a lower than expected CPI.
The action overnight finally saw some consolidation in the tremendous recent move lower in the JPY (and to a lesser extent the USD) on no single identifiable catalyst, though a huge sell-off in oil prices seemed to have developed before the move set in and an ugly close in the US equity market (third down day in a row) saw risk appetite a bit weak in the knees. By the middle of the European session today, however, the market decided that it had the green light to put back on the carry trades, though there is still some lost terrain to recover from yesterday’s highs in commodity and other correlated prices. All in all, the carry trade/commodity/risk trade appears far less monolithic than it did mere days ago with the most significant cracks to appear in the uptrend in almost a month. This suggests the risk of at least some distribution in coming days.
UK Data weakens sterling
The pound was hit by weak data on two fronts: inflation and retail sales. The British Retail Consortium reported a record -3.5% drop in “like for like” sales for the year on year comparison, though some of the blame for the drop relates to the timing of Easter last year (the March figure for the previous year showed a +4.4% increase, so the comparison wasn’t particularly friendly), so the news isn’t quite as bad as the headline suggests and we can expect some measure of mean reversion for the April figures. Still, some of the weakness can be attributed to higher food and energy price squeezing relatively stagnant wages in the UK this year.
The pound was hit by weak data on two fronts: inflation and retail sales. The British Retail Consortium reported a record -3.5% drop in “like for like” sales for the year on year comparison, though some of the blame for the drop relates to the timing of Easter last year (the March figure for the previous year showed a +4.4% increase, so the comparison wasn’t particularly friendly), so the news isn’t quite as bad as the headline suggests and we can expect some measure of mean reversion for the April figures. Still, some of the weakness can be attributed to higher food and energy price squeezing relatively stagnant wages in the UK this year.
Even more influential on the trajectory of the pound in today’s trade was the CPI report for March, which suddenly showed a slower increase in headline and core inflation than feared, taking the steam out of the seeming inexorability of the upward trend and also taking a considerable chunk of near term expectations for tightening from the Bank of England – on the order of 15 basis points, in fact. This saw EURGBP to new highs for the cycle at 0.8900 and close to the highest levels since last October as the market likely feels that the BoE will seize on any evidence available to delay moving on interest rates as it frets weakness in the UK economy from the government’s austerity program.
On the positive side of the ledger, the UK trade balance for February was its smallest since February of last year and emphasizes how tax rules were instrumental in aggravating the decline in the UK’s terms of trade late last year. Let’s see how the trade balance adjusts as we head toward summer and the effects of this tax transition fade.
Odds and ends
The Bank of Canada looks set to leave rates unchanged for now as the Bank is likely eyeing CAD’s level nervously and as the market may fret the bank’s reluctance to move. Guidance will be critical for judging whether the market’s expectation of about 90 bps of policy tightening for the coming 12 months is justified. Rate spreads versus the USD at the front end of the curve are at their widest of the cycle after the dovish hard core among Fed members (including Yellen most importantly in a speech yesterday) still appears set on keeping policy loose for now
The Bank of Canada looks set to leave rates unchanged for now as the Bank is likely eyeing CAD’s level nervously and as the market may fret the bank’s reluctance to move. Guidance will be critical for judging whether the market’s expectation of about 90 bps of policy tightening for the coming 12 months is justified. Rate spreads versus the USD at the front end of the curve are at their widest of the cycle after the dovish hard core among Fed members (including Yellen most importantly in a speech yesterday) still appears set on keeping policy loose for now
The kiwi continues to spike northward versus the USD despite little change in rate spreads, following both the reversal back to the upside for carry trades overnight. The house prices release for New Zealand overnight did little damp enthusiasm for the currency, which may be spiking on capital flows into the country aimed at rebuilding after the devastating Christchurch earthquake. As well, the RBNZ and government may be complacent on the currency’s strength for a time, as a stronger currency will make rebuilding-related import purchases less expensive. Still, the time may soon run out on the kiwi’s strength if risk aversion sets in for any length of time.
The Aussies should fear getting Dutch disease (when an important commodity-related industry blots out the competitiveness of the rest of a national economy) and indeed, Treasure Wayne Swan was out bellyaching on the ill effects of the Aussie on some of the country’s export industries like tourism and educational services. The challenges posed by a strong Aussie will likely come increasingly into focus at upcoming RBA meetings.
Chart: AUDJPY
The AUDJPY pair was one of the more volatile overnight as commodity prices swooned late yesterday before partially recovering today. Movement in metals prices was choppy and the AUDJPY pair reflects that, just as it will also likely react to any near term moves in government bond rates.
The AUDJPY pair was one of the more volatile overnight as commodity prices swooned late yesterday before partially recovering today. Movement in metals prices was choppy and the AUDJPY pair reflects that, just as it will also likely react to any near term moves in government bond rates.
Looking ahead
The first of the US treasury auctions is up today as the treasury is set to auction a whopping $32 billion of 3-year notes. Tomorrow’s 10-year auction will receive more focus and bond yields are critical for the highest momentum trades out there at the moment (JPY crosses, in particular!) Also extremely important is Obama’s budget speak as we look at how close the administration comes to a vague sense of understanding the scale of change needed if the US is ever to balance its budget.
Up later we have the US trade balance, perhaps not likely to show any strong improvement due to the increase in oil prices, though the ex-petroleum data bears watching. Also watch the Canadian International Merchandise trade for signs on whether the old down-trend is returning or whether the recent rise is blossoming into something more permanent.
Tomorrow we have US Retail Sales.
The first of the US treasury auctions is up today as the treasury is set to auction a whopping $32 billion of 3-year notes. Tomorrow’s 10-year auction will receive more focus and bond yields are critical for the highest momentum trades out there at the moment (JPY crosses, in particular!) Also extremely important is Obama’s budget speak as we look at how close the administration comes to a vague sense of understanding the scale of change needed if the US is ever to balance its budget.
Up later we have the US trade balance, perhaps not likely to show any strong improvement due to the increase in oil prices, though the ex-petroleum data bears watching. Also watch the Canadian International Merchandise trade for signs on whether the old down-trend is returning or whether the recent rise is blossoming into something more permanent.
Tomorrow we have US Retail Sales.
Economic Data Highlights
- UK Mar. BRC Like for Like sales out at -3.5% YoY vs. -0.4% in Feb.
- UK Mar. RICS House Price Balance out at -23% vs. -24% expected and -26% in Feb.
- New Zealand Mar. QV House Prices out at -2.0% YoY vs. -1.7% in Feb.
- Australia Mar. NAB Business Conditions out at 9 vs. -2 in Feb.
- Australia Mar. NAB Business Confidence out at 9 vs. 14 in Feb.
- Japan Mar. Machine Tool Orders out at +49.5% YoY vs. +73.9% in Feb.
- Sweden Mar. CPI Headline Rate out at +0.7% MoM and +2.9% YoY vs. +0.8%/+2.9% expected, respectively and vs. +2.5% YoY in Feb.
- Sweden Core CPI out at +0.4% MoM and +1.5% YoY vs. +0.7%/+1.7% expected, respectively and vs. +1.3% YoY in Feb.
- UK Feb. DCLG House Prices out at +0.7% YoY vs. +0.1% expected and vs. +0.5% in Jan.
- UK Feb. Visible Trade Balance out at £6776M vs. -£8000M expected and -£7789M in Jan.
- UK Mar. CPI out at +0.3% MoM and +4.0% YoY vs. +0.6%/+3.3% expected, respectively and vs. +4.4% YoY in Feb.
- UK Mar. Core CPI out at +3.2% YoY vs. +3.3% expected and 3.4% in Feb.
- UK Mar. RPI out at +0.5% MoM and +5.3% YoY vs. +0.6%/+5.5% expected, respectively and vs. 5.5% in Feb.
- Germany Apr. ZEW Survey out at 7.6 vs. 11.3 expected and 14.1 in Mar.
- EuroZone Apr. ZEW Survey out at 19.7 vs. 31 in Mar.
- US Mar. NFIB Small Business Optimism out at 91.9 vs. 95.0 expected and 94.5 in Feb.
Upcoming Economic Calendar Highlights (all times GMT)
- Canada Feb. New Housing Price Index (1230)
- Canada Feb. International Merchandise Trade (1230)
- US Mar. Import Price Index (1230)
- US Feb. Trade Balance (1230)
- Canada Bank of Canada announces interest rate (1300)
- US Fed’s Hoenig to Speak (1315)
- US Fed’s Tarullo to testify on derivatives (1845)
- US Fed’s Fisher to Speak (1850)
- US Weekly API Crude Oil and Product Inventories (2030)
- New Zealand Mar. REINZ House Price Index (2200)
- Japan Mar. Domestic CGPI (2350)
- Australia Apr. Westpac Consumer Confidence (0030)
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