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Risk FX Rises, But Rally Capped

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Top Stories

  • RBA Minutes assume a hawkish stance
  • UK CPI hotter at 4.5% vs. 4.2%
  • Nikkei up 0.09% Europe off -0.14%
  • Oil at $96.91/bbl
  • Gold $1496/oz.

Overnight Eco

  • EUR German ZEW Economic Sentiment 3.1 vs. 4.8
  • EUR ZEW Economic Sentiment 13.6 vs. 17.9
  • GBP CPI y/y 4.5% vs. 4.25
  • GBP RPI y/y 5.2% vs. 5.35
  • GBP Core CPI y/y 3.7% vs. 3.4%
  • GBP DCLG HPI y/y 0.9%

Event Risk on Tap

  • USD Building Permits expected at 0.59M
  • USD Housing Starts expected at 0.58M
  • USD Capacity Utilization Rate expect at 77.7%
  • USD Industrial Production m/m expected at 0.5%
  • CAD Foreign Securities Purchases expected at 4.37B

Price Action

  • USD/JPY rises through 81.50 on M&A flows
  • AUD/USD rallies towards 1.06 after RBA suggest more rates to come
  • GBP/USD rallies to 1.6300 on hotter CPI
  • EUR/USD - breaks above 1.4200 on strong Spanish auction results

Risk FX rallied in early European trade today with EUR/USD supported by strong results from the Spanish T-bill auction while cable got a lift from hotter than expected CPI data. Sterling rose more than 0.5% as it neared the 1.6300 figure as inflation showed no signs of easing, while EUR/USD broke above 1.4200 on relief that sovereign debt concerns did not spill over into Spanish credit markets.

UK CPI data printed hotter than expected rising at an annual rate of 4.5% versus 4.2% eyed. The annual core CPI rose to record high while the headline data was the strongest since October of 2008. Inflation rose 1.0% on a month to month basis -only the second time since 1996 that it has increased by 100 basis points or more in a single month.

The rise in inflation was driven by a rise in transportation costs, no doubt pressured upward by spiking energy prices. An increase in excise duty on alcohol and higher rental costs also added to the upside surprise. Tonight's news suggests that despite a slowdown in economic activity, inflation remains a chronic problem for the UK economy and is unique in its intensity in comparison with other G-10 economies.

The current situation puts the UK policymakers into a very uncomfortable position as they try to balance the need to contain prices while at the same time providing a supportive environment for growth. Nevertheless, the pressure on the BOE to tighten monetary policy is likely to increase. UK interest rates markets are now fully pricing in a 25bp hike by the end of the year.

Meanwhile in the EZ the EUR/USD ignored a lackluster ZEW reading which printed at 3.1 versus 4.8 as traders were bolstered by the results of the Spanish T-bill auction which saw the yields priced at 2.55% versus 2.77% the period prior. The news suggests that the financing problems of Greece have not yet dampened investor appetite for Spanish debt limiting the contagion impact of the debt crisis in the EU periphery economies. Greece itself was able to sell 1.6 billion euros worth of bills at 4.06% rate but the take up from foreigners was only 31% versus 36% previously.

Despite the respectable auction results the econ data from the region continues to signal deterioration of economic activity. The latest ZEW survey showed a decline to 3.1 from 4.8 eyed as the index has fallen below its historical average. The EU periphery debt crisis, higher energy costs and global imbalance continues to worry investors and ZEW's economists predict that the May readings will show a further drop in sentiment. Given this challenging environment we believe it is highly unlikely that the ECB would continue to raise rates irrespective of the economic conditions on the ground. Therefore the upward momentum in the EUR/USD will be limited until markets once again see evidence of pickup in growth.

Note: I will be travelling for the next several weeks, the next daily will appear after Memorial Day on May 31st.

FX Upcoming

Currency GMT EST Release Expected Prior
USD 12:30 8:30 Building Permits 0.59M 0.59M
USD 12:30 8:30 Housing Starts 0.58M 0.55M
USD 13:15 9:15 Capacity Utilization Rate 77.7% 77.4%
USD 13:15 9:15 Industrial Production m/m 0.5% 0.8%
CAD 12:30 8:30 Foreign Securities Purchases 4.37B 2.50B

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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