Daily FX Wrap: Tight trade through the day, but the USD struggling for fresh upside traction across all counterparts bar the CAD. Treasuries leading, but USD/JPY demand in evidence below 111.00.
FX markets have been pretty tight as the markets slowly return to full strength. London and NY centres are back up and running, but with a host of US data to look to through the week, the cautious start is not unsurprising. Today’s core PCE rate was the focal point, which rose a little more than expected in April, but which maintains the yearly rate at 1.5%, comfortably below the Fed target rate. Income and spending rose 0.4% as expected, but the USD uptick was a modest one, as the US payrolls on Friday preceded by the ISM PMIs keep a host of traders on the side-lines for now.
USD/JPY has really been struggling for upside traction, but is tracking yields where the key 10yr has been holding in and around 2.25%. Despite this, dip buyers are coming in below 111.00. Early on in the European session we saw the pressure coming through the cross rates, as a modest risk averse mood was perpetuated by reports that Greece may ‘opt out’ of the next bailout payment. EUR/JPY selling was noted in the mix as a result, dipping to lows ahead of 123.00 before reclaiming 124.00 later in the day.
Later in the day, and just ahead of the German inflation stats, we had yet another source story suggesting the ECB may change tack at the June meeting, and this prompted the usual response from the algos, but after we saw the data coming in softer than expected, the EUR/USD upturn was temporarily reversed. Early on in the morning, the EU sentiment indices were on balance a touch softer than expected, notably the services sentiment and business climate, but this was ‘absorbed’ through the afternoon. EU wide CPI out tomorrow, ahead of which we get the German retail sales and employment reports and French HICP.
Late in the day however, we saw EUR/USD pushing back towards the session highs around 1.1200, where we some modest resistance (4 hourly), but this looked to be coming through the EUR/GBP rate which sees a bid tone coming from Europe on month end flow. Cable was refusing to give up any ground after bottoming out just below 1.2800 last week, holding the figure level through Tuesday to maintain the slow grind higher towards 1.2900 again. This is all down to USD softness to a larger degree, but we sense the EUR cross rate may come under fire again once the real money demand flow through at the end of day Wednesday. Little to note from either a political or economic perspective, as the election polls were largely unchanged. Data tomorrow focuses on mortgages and lending.
Into the overnight session ahead, and we have China back in the mix after their two day holiday. The official May PMIs are due for release, with the key manufacturing components seen slipping to 51.0 from 51.2, and this will make for interesting reading given some of the losses seen in the leading metals – Copper having slipped back into the mid USD2.50-60 zone. AUD has been fairly resilient as a result, holding the mid 0.7400’s despite further pressure coming through the AUD/NZD rate. On the domestic front, Australian credit data due, while in NZ, we have RBNZ governor Wheeler due to speak with focus on any potential rhetoric related to the budget.
In Japan, we have some industrial production numbers, and any improvement seen here – as is expected – will have a minimal impact as the focus remains on sluggish inflation. Finally, back in the North American session, key GDP data for Q1 due Wednesday. Feb was a flat month, but forecasts centre around a 0.2% rise in Mar. The annualised Q1 rate is seen rising from 2.6% to 3.6%, and this would go some way in underpinning some of the cautious optimism reflected in the BoC statement last week. Today’s USD/CAD rise to 1.3500 was purely on the back of the widening current account balance, while IPPI rose a little more than expected. The implications for end inflation are tenuous at this stage, but as Oil prices stabilise, CAD limits are tighter, but we see sub 1.3400 and pre-1.3600 the levels to watch.