FX gets a kick out of fundamentals

UK economic data has dominated FX markets this morning. UK inflation and German investor confidence have both weighed on the dollar crosses and thwarted the uptrend in the buck for now.

Sterling rallied early this morning on the back of rumours that April’s CPI print would be stronger than expected. The actual figure came in at 4.5 per cent, beating analyst expectations of 4.1 per cent. The jump in inflation was driven by transport, where fares jumped nearly 30 per cent compared to March as people tried to get away over the prolonged Easter/ Royal Wedding break. Interestingly, petrol and diesel prices fell due to a fall in excise duty last month.

Overall, this data is very difficult to read due to the seasonal effects caused by the super holiday. We shall have to wait until June 15 for the next CPI reading to see if inflation pressures have indeed moderated as oil prices have come off. Sterling reacted well to the news although it has failed to break through the 1.6300 mark, which is stiff resistance for now.

Tomorrow’s data out of the UK including MPC minutes, Bank of England growth forecasts and wage and labour market data will also be pivotal to determine how close the BOE is to hiking interest rates. Thus, we expect 1.6300 to be the high for now, with a further bout of pound strength likely if the minutes are on the hawkish side. However, any weakening in wage growth, which has remained subdued since the financial crisis, may delay a rate hike and weigh on the pound. So we are data watching for now.

We also heard from new MPC member Ben Broadbent this morning, who was commenting to the Treasury after the release of the inflation figures. He will replace the MPC’s most hawkish member Andrew Sentence at the end of this month. He said the Bank’s inflation forecast was reasonable and that he expected inflation to fall. He said that he didn’t see inflation expectations becoming de-anchored any time soon, however, he also said that the true amount of spare capacity was less than the 10 per cent or so currently being registered.

Based on this limited testimony we can gather that although he initially appears less hawkish than Sentence, he is more concerned about elevated inflation than Mervyn King, so he lies somewhere in the middle of the MPC. We will have to wait until next month to see how he votes, although it doesn’t seem like he is in any rush to hike rates especially since he doesn’t see inflation expectations going out of control.

The euro remains near the top of its recent range as the dollar rebound loses some steam. The single currency was also boosted by the German ZEW investor confidence survey. The component that measures sentiment towards the current situation rose to the highest level in the cycle at 91.5, up from 87.1 in April. Interestingly, the rise comes after the ECB rate hike, however as some commentators have pointed out this boosts interest paid on bank deposits increasing the wealth effect felt by German savers.

However, the survey provided mixed signals with the 6-month forward looking indicator falling for the third consecutive month in a row. This suggests that investors are slightly concerned that growth has peaked in Germany, and the impact of high inflation could weigh on household spending. Investors may also be concerned that further bailouts for Portugal and a potential second hand out for Greece will hit Germany the hardest since it contribute the most to the bailout funds.

But FX traders took the good news and ran with it, pushing EURUSD up to 1.4250. It has since fallen back after comments from EU Commission President Juncker said that Greek debt levels are unsustainable. He suggests that Greece needs to cut spending and privatise state-owned firms rapidly to bring national debt under control. This is a tall order. If Greece wants to grow then a realistic fiscal consolidation plan needs to be put in place, not one that suits the German taxpayer. This makes the IMF crucial in the sovereign debt crisis; however the problems with the IMF chief and his arrest in the US complicate its position in the current stage of the negotiations.

So far sovereign concerns haven’t had the same effect on the euro as they did this time last year. Investors are betting that European officials will come up with the goods to keep a lid on the crisis and stop it from spreading to Spain. However, local elections in Spain next week along with the release of the banking stress tests for Spain’s troubled Caja banks next month could increase the pressure on the Iberian nation’s bonds. Already newspaper reports today suggest that Spain’s local and regional administrations have “hidden” debts totalling as much as EUR26bn. These are the sort of headlines the EU authorities don’t need while they try to deal with Greece’s on-going problems.

Elsewhere, the RBA minutes were more hawkish than expected, which boosted the Aussie. However, it remains vulnerable at 1.0600 highs versus the greenback especially as commodities remain under pressure.

We are seeing some differentiation in the price action across asset markets today. FX markets are moving on the back of their own fundamentals. Stocks are lower across Europe on the back of weakening global growth fears and investors remaining wary of holding on to risk, while commodities are slightly higher.

The dollar remains fairly range bound with a weak tone, as sentiment to the buck gets hit by concerns as the US hits its debt ceiling. While Europe seems to be dealing with its debt crisis, although there are genuine concerns that its approach is wrong, the US is playing accounting tricks to increase its debt ceiling….This may thwart the greenback’s attempts to rally until another wave of sovereign debt fears grip investors.

Ahead today look out for US housing market data and news stories on Greek debt “re-profiling” from the Ecofin meeting or Spain’s hidden debts.

Источник: Forex.com

17.05.2011