06 April 2011 at 8:12 GMT
Overnight we heard China announce another 25bp hike in interest rates to counter inflation pressures (the fourth time since October) just at the end of a two-day public holiday raising suspicions that next week’s data may beat forecasts again (The China Securities Journal today ran a piece suggesting Chinese inflation may top 6% in coming months).
Chinese stocks showed a kneejerk negative reaction at the open today but quickly recovered and spent most of the session in positive territory. It was a similar story in currency markets with the AUD singled out for underperformance early on but recovering, along with risk appetite, to trade higher on the day.
Eyes are still firmly fixed on tomorrow’s ECB meeting and the almost guaranteed rate hike is supporting the EUR even in light of more negative news from the EU periphery debt situation (Portuguese banks reportedly facing liquidity issues).
Apart from the China news, Asia was limited to more second-tier data releases and we saw an extension of JPY selling with carry trade plays in light of ultra easy liquidity from the BOJ and reduced exporter hedging in light of slower manufacturing post-earthquake both driving factors.
Interest rate outlooks continued to be the major driving force of currency direction overnight with the ECB, Bank of England and BOJ meetings now in the sights. The EUR struggled to maintain its headway versus the dollar despite a firmer services PMI number, while weak retail sales and continued weakness in Portuguese debt ensured EURUSD stayed close to the 1.42 level for most of the session. Talk of a hawkish ECB think tank report gave final impetus for the pair to close near the highs of the day. A strong services PMI saw GBPUSD surge higher, touching its highest level in almost 2 weeks, with a small minority now suggesting that the BOE may make a move to tighten at this week’s meeting (general consensus is for no change). CAD remained bid as oil held firm above $108 p/barrel.
The release of FOMC minutes for the March 15 meeting showed some members noting a possible need for policy tightening this year, or certainly a watchful eye on inflation expectations, while rumours the Fed could remove liquidity via reverse repos helped the dollar post marginal gains for the second day running. Some of the wind was taken out of the dollar’s sails however when the non-manufacturing ISM data came in below forecast with a slump to 57.3 from 59.7 last.
Heading into Europe and we have UK Halifax house prices, industrial production, Swiss CPI, final Q4 GDP for the Euro-zone and German factory orders on tap. It is another quiet North American session with Canada’s Ivey PMI the only release featured.
Economic Data Highlights
- US Mar. ISM Non-manufacturing out at 57.3 vs. 59.5 expected and 59.7 prior
- UK Mar. BRC Shop Price Index out at +2.4% y/y vs. 2.7% prior
- AU Feb. Home Loans out at -5.6% vs. -2.0% expected and revised -6.3% prior
- China Mar. HSBC Services PMI out at 51.7 vs. 51.9 prior
- HK Mar. PMI out at 54.9 vs. 53.7 prior
- JP Feb. Coincident Index out at 106.3, as expected, vs. 105.9 prior
- JP Feb. Leading Index out at 104.2, as expected, vs. 101.5 prior
Upcoming Economic Calendar Highlights
(All Times GMT)
- UK Halifax House Prices (0700)
- Swiss CPI (0715)
- UK Industrial/Manufacturing Production (0830)
- EU Final Q4 GDP (0900)
- GE Factory Orders (1000)
- US MBA Mortgage Applications (1100)
- CA Ivey PMI (1400)