26 April 2011 at 16:16 GMT
EURUSD bounced from yesterday’s consolidation as Trichet sees signs “here and there” of second round inflation effects. In the meantime, all eyes are on Wednesday’s FOMC meeting as the USD trades nervously towards the bottom of the recent range.
Trichet spoke of the risk of second round inflation effects in interviews with Finnish newspapers, but only said that he saw signs of such effects “here and there” and there was little reaction in the futures market. Rather, it appears the moves in the EURUSD are more about nervousness heading into tomorrow’s FOMC meeting, where from the appearance of the current market action, there are virtually no expectations of Bernanke having anything to say that will support the USD (more on this below).
Odds and ends
The first real data on Japan’s retail activity showed the extent to which the earthquake/tsunami disrupted the economy as the April department store sales data saw a stunning -14.7% YoY decline. While USDJPY remains under a degree of pressure, many of the other JPY crosses bounced overnight from new multi-day lows. While the JPY found a bit of support recently on the support in the world’s biggest bond markets over the last few days, an interesting story out from Reuters today says that several of the largest Japanese life insurers plan to increase buying of unhedged foreign bonds, with the assumption that the JPY will remain weak.
GBP has retraced virtually all of its gains vs. the Euro over the last couple of days as short sterling futures show the market continuing to unwind its projections for BoE tightening. Part of that development was on the latest Trichet rhetoric on inflation, but some weakness in GBP today may have been driven by a much weaker than expected CBI Trends report for April that was released today. According to the Credit Suisse measure of year forward BoE expectations, the anticipated tightening has dropped from over 80 bps less than three weeks ago to about 45 bps today. Still, GBPUSD broke above the key 1.6400 are last week and this week remains pivotal for that pair in the wake of whatever Wednesday’s FOMC meeting and press conference bring.
It was interesting to see AUDUSD surviving the histrionics in the silver market yesterday and today on the expiration of May options yesterday and the April contract today, when silver traded at almost 50 yeasterday and below 45 briefly today. We remind that the currency is extremely correlated to metals prices and other assets like BHP Billiton stock. Doing a chart study today, in fact, we have noticed that BHP equity often turns ahead of the turn in AUD, so we’ll keep an eye out for any divergences.
Looking ahead
For all of those living under a rock, the FOMC is on tap for tomorrow and is the last real chance to make a final statement on the end of QE2 (the market needs an explicit statement that the program will end as planned on June 30 with no tapering, etc.). As well, the other side of the meeting will see Bernanke’s first press conference, in which we get to hear his quavering voice pontificating on transitory inflation that is only not being felt at the Fed, by all appearances. Worth noting about the last two meeting cycles, which it very much appears this market is trying to repeat: heading into the meetings, Fed rate expectations were generally falling (slightly in late January, with the USD weakening very rapidly, however. In mid-March, Fed expectations were falling very rapidly heading into the meeting, while the USD had found a slight boost on the risk aversion from the Japanese disaster.) In the wake of both meetings, Fed rate expectations rose very rapidly. The USD was at first weak for a few days, but then managed to stay rangebound for two or more weeks in both instances. This time around, we again have Fed expectations extremely low heading into the meeting. Should we expect a further small leg down in the USD followed by a couple of weeks of consolidation or is to easy to expect the market to repeat itself so exactly each time?
Besides the FOMC main event tomorrow, we also have a couple of important GDP reports out this week, including the UK’s GDP for Q1 set for release tomorrow (expected to show +0.5% growth for quarter on quarter, bolstered by the rapidly improving trade balance (that was itself caused by end of year tax code changes)). The US GDP is up on Thursday and despite an 11% budget deficit this year, is only expected to show a 2.0% annualized growth. Good luck with that deficit reduction/growth thing, USA…
On Thursday, the BoJ will be out with its latest “rate decision” and is likely to announce the latest batch of easing measures aimed at shoring up the Japanese economy while it continues to struggle with rebuilding.
Be careful out there.
Economic Data Highlights
- Australia Feb. Conference Board Leading Index rose +0.6% vs. +0.1% in Jan.
- Japan Mar. Nationwide Department Store Sales fell -14.7% YoY vs. +0.7% in Feb.
- Switzerland Mar. Trade Balance out at +1.09B vs. +2.38B in Feb.
- Switzerland Mar. UBS Consumption Indicator out at 1.66 vs. 1.45 in Feb.
- Sweden Mar. Unemployment Rate rose to 8.1% vs. 7.8% expected and 7.9% in Feb.
- UK Apr. CBI Trends Total Orders fell to -11 vs. 2 expected and 5 in Mar.
- UK Apr. CBI Trends Selling Prices rose to 36 vs. 33 in Mar.
- US Feb. S&P/CaseShiller Home Price Index out at -3.33% YoY vs. -3.3% expected and -3.1% in Jan.
- US Apr. Consumer Confidence rose to 65.4 vs. 64.5 expected and 63.8 in Mar.
- US Apr. Richmond Fed out at 10 vs. 20 expected and 20 in Mar.
Upcoming Economic Calendar Highlights (all times GMT)
- US Weekly API Crude Oil and Product Inventories (2030)
- Japan Mar. Retail Trade (2350)
- Japan Apr. Small Business Confidence (0100)
- New Zealand Apr. NBNZ Business Confidence (0100)
- Australia Q1 Consumer Prices (0130)