Japanese equities saw solid gains during the overnight session, with the Nikkei posting a strong 0.64% increase after reopening following yesterday’s public holiday in the region. Bucking the usual correlation, the yen also strengthened throughout the Asian session and into Europe, gaining close to 0.4% against the USD and leading the USDJPY pair into the mid-99s.
The Aussie is getting a lift today after the minutes from the last RBA meeting were interpreted as a little less dovish even as some members thought the AUD was still high. Shorts have been squeezed this morning and could be thinking Bernanke might ease up on any taper talk during his two-day testimony that begins on Wednesday. AUDUSD is ripping higher before the opening bell in North America, up almost a full figure and a half to establish itself north of 0.9200.
On the economic docket for today is a vast amount of consumer price data, as we received readings on inflationary pressures in the UK and Europe overnight, with American data hitting the wires first thing this morning.
The Pound has come under increased pressure since the middle of June, accelerating its declines against the USD as incoming Governor Mark Carney struck a decidedly dovish tone at the last Bank of England Policy meeting. Today’s CPI numbers were closely watched in order for the market to gauge how much room the MPC has to maneuver in terms of delivering more QE to sop up the persistent slack in the economy, without negatively affecting the purchasing power of consumers and further questioning the success of the transmission mechanism in implementing the BoE’s asset purchase program.
The bounce Cable sustained after the hitting multi-year lows has failed to follow through with too much conviction, and is continuing to struggle after the softer than expected inflation readings. Expectations were for the consumer price basket to increase by 3.0% over the last 12 months, up from the 2.7% reading registered in May; however, the official reading came in at 2.9% and saved Mr. Carney from having to write a letter to the chancellor explaining why the BoE was unable to keep inflation within its targeted band. The reaction in GBPUSD was relatively muted after the numbers, with the pair managing to find support in the sub-1.5050 area, which has capped near-term weakness.
Moving over to continental Europe, German economic sentiment as surveyed by the ZEW Institute was released earlier this morning. Expectations were for institutional investors to be a little more optimistic on the health of the economy than the prior month, with the median analyst forecast coming in at 39.6. Recent weak economic indicators such as industrial production and foreign trade weighed on the official reading, with the survey missing expectation and coming in at 36.3, down from the 38.5 registered in June. The reading shows that there is still confidence in the robustness of the Germany economy, however there is still a long way to go.
We also received final inflation data from the common-currency bloc, but coming in right on expectations of a 1.6% increase on a y/o/y basis, did little to move markets. Economic data flow didn’t get any better for the zone, as figures released earlier this morning showed car sales fell to a 17-year low in June. Echoing some of the striking effects austerity is having on the region, 400k fewer cars were sold than a year ago during 2013, which also encompasses a 5.6% slump in new vehicle registration.
Despite the worse than expected data out of the EU, the EUR is grinding higher against the USD this morning, with technical positioning and selling on the crosses boosting demand for the EUR. EURUSD is trying to establish itself above the 1.31 handle midway through the European session, however equities are not displaying the same exuberance, with the major bourses in the red ahead of the US CPI data.
The hot topic of when the Fed will look to taper their monthly asset purchases was back in the headlines this morning, as the June inflation numbers were released. Bernanke’s speech last week on the 10th was deciphered by the markets as being quite dovish, referencing the fact that given the weakness in the labour market and the softer than forecast inflation, the overall thrust of monetary policy is one that is likely to remain highly accommodative.
In addition, St. Louis Fed President Bullard dissented against the last policy statement, feeling that the Committee should signal more strongly its willingness to defend the lower-bound of its inflation goal. The numbers this morning eased some of the Fed’s fear’s about weak inflation, as the price increase for the last 12 months through June came in at 1.8%, up from the 1.4% registered in May and beating the forecast of 1.7%. A sharp rise in the gasoline index accounted for about two thirds of the 0.5% monthly increase in June, and when stripping out food and energy prices, the core reading came in bang on expectations of a 0.2% monthly increase.
The DXY clawed back some of its earlier losses after the release, with the Loonie also forfeiting its overnight gains at its dollar counterpart to the south garnered some bids. Buying pressure in the big dollar helped USDCAD find support at the 1.0400 handle, with the pair unable to charge any lower. Equity futures are off their earlier highs, now sitting just slightly negative before the opening bell, losing momentum after the warmer than forecast CPI reading. Hydrocarbons are stronger this morning, with front month Crude trying to push into the $107/barrel region; Brent is also attracting some positive attention, changing hands at $109.42 barrel.
Tomorrow could turn out to be a very lively day tomorrow for USDCAD, highlighted by a testimony from Bernanke and Poloz’s first meeting as BoC Governor. Make sure to speak with your dealing teams in regards to placing limit orders ahead of tomorrow’s event risk, as the combination of speeches from the two central bank heads could present some attractive opportunities to take advantage of volatility.
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