USD Modest USD weakness continued to be t he theme yesterday afternoon, thoug h the USD losses were quite modest in aggregate and the USD finished little changed from Eu ropean opening levels. The market continues to wait for next week’s FOMC, and ahead of that will find it hard to react too much to data like today’s retail sales and Michigan sentiment. Having said this, stronger data will still be positive for the USD at the margin, though it remains the case that the USD is struggling to make gr ound while equities remain firm. The market expectation still centres on the $10-15bn area in terms of the likely tapering, and it is hard to predict a major market reaction if this is indeed the outcome. But the spin from the stat ement and the press conference could still affect things. GBP Yesterday’s testimony saw the MPC continue to distance themselves from the need to react to the higher yields that have been seen since the announc ement of forward guidance, with Carn ey pointing out that the bank rate itself was the most important rate fo r businesses, that they were trying to communicate directly with households and businesses and not just with the market, and even that a steep curve could help recovery. All of which suggests that the market can pretty much forget about forward guidance and just react to the economic data. Even so, the fact that the UK curve is already more than 18 mont hs ahead of the Bank in their estimate of the first rate hike does mean there are some limits to how much furt her UK yields can rise, so any scope for GBP gains may now come from declines in yields elsewhere. EUR EUR strength yesterday was hard to justif y given the weakness of EZ industrial production for July (see chart on page 2) which sets a very high bar for the August and Septem ber data if growth is to continue to recover. In this context, the front end of the EUR curve continues to look far too steep, and we would expect lower front end yields in the Eurozone to start to weigh on the EUR agains t most currencies before long. EUR/USD looks extended above 1.3320. AUD The disappointing employment report triggered a sharp declin e in AUD/USD. While the rise in unemployment rate was expected; the decline in net employment was not. This prompted a slight rise in rate cut expectations, which had declined sharply over the past week helped by the better Chinese data. Though additional stimulus remains a possibility, one weak data print will unlikely be sufficient to increase the need for further stimulus significantly, especially following the recent better Chinese data. We ex pect the RBA will prefer to wait for more incoming data to assess the economic outlook before deciding on further stimulus - Q3 CPI is released at the end of October. The 0.9300/50 area remains decent resistance on the topside
Posted on: Fri, 13 Sep 2013 11:35:07 +0000
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