Main interest for markets through the morning was in the UK with the better than expected UK industrial production print and a moment ago the BoE meeting. Industrial production rose by 0.7% MoM in March following a 0.9% MoM gain in February. Manufacturing output was even stronger rising by 1.1% MoM in March. The numbers are consistent with the better than expected preliminary GDP print which suggested that the UK economy grew by 0.3% QoQ in QI. UK economic news continues to surprise positively – admittedly relative to very depressed expectations – and GBP continues to reap the benefits. GBP/USD popped up to 1.5585 following the release, but fell short of the GBP/USD 1.5606 3-month high. However, GBP remained focused to the upside going into the May BoE monetary policy decision. In the event the MPC left bank rate unchanged at 0.5% and the asset purchase target also unchanged at GBP375b. There was no accompanying statement meaning that markets will have to wait two weeks until publication of the minutes to see whether there was a change in the voting pattern. Either way, GBP has extended its gains following the announcement and has pushed up to 1.5588 at time of writing.
European markets and the EUR were generally directionless through the morning with much of the region on break for the Ascension Day break. EUR/USD has lifted to as high as 1.3194 following yesterday’s release of much stronger than expected German March industrial production data and an upward revision to the previous month’s data. This data, combined with the Q1 German retail sales point to a firm Q1 German GDP print. Perhaps adding some further fuel to the rally, ECB Executive board member Joerg Asmussen has indicated the majority of ECB policy makers are in favour of Asset Backed Purchases (ABS) to assist small and medium-sized enterprises, as part of the ECB’s quantitative easing process. The ECB also indicated that it is to review the quality of bank loans. It appears the ECB is considering a shuffle of assets on its balance sheet, rather a broad-based increase in quantitative easing. The policy, if adopted by the ECB, would be similar to one the Fed has run during the early part of its quantitative easing policy. We are not bearish EUR/USD, but do not regard the current levels in EUR/USD as great buying opportunities.
The AUD/USD spiked higher in today’s Asian trade after the April Australian labour market report came in stronger than expected. Total employment rose by 50,100 in April, driven by a 34,500 rise in full-time employment. The market consensus was centred on an 11,000 increase (CBA +15,000). Highlighting the strength of the labour market report, the Australian unemployment rate fell by 0.1ppt to 5.5% despite a lift in the participation rate. As we stated following the RBA rate cut earlier this week, we expect AUD/USD to track higher, back up towards its 2.5 year average of 1.0310. The stronger than expected Australian labour force report may assist this lift further in today’s early European trade. The next focus for the AUD will be on the RBA’s Statement on Monetary Policy (2:30am BST). We do not anticipate any substantive changes to the RBA’s GDP forecasts; however a mild downward revision to its inflation outlook is likely. Given the decision to cut the cash rate appears largely linked to the dampening impact of the AUD, it would not be surprising if the RBA provides further analysis or increases its rhetoric regarding the currency.
NZD/USD surged back above 0.8450 in the Asian morning, after the release of much better than expected Q1 NZ labour market data. Employment lifted 1.7%QoQ (CBA/market expectation +0.8%QoQ). The unemployment rate dropped from 6.8% to 6.2% Part of the quarter’s strength is probably catch up from previous quarters, which we have consistently believed overstated the degree of weakness in the labour market. The NZD has now recouped all of yesterday’s drop in the wake of the RBNZ’s intervention comments. We expect the NZD can press modestly higher today, but with the RBNZ’s comments regarding intervention still fresh in participants’ minds, gains may be limited. Accordingly, NZD may underperform AUD over the London and New York sessions.
The Bank of Korea cut its benchmark 7-day repurchase rate to 2.5% form 2.75% today. The majority of economists had expected the BoK to remain on hold at this meeting, but in the event, the board voted 6-1 to ease. The accompanying statement provided a few key rationales for the rate cut, although the overall tone on the domestic economy remains an upbeat one. The recent JPY weakness was mentioned along with the usual “slow recovery” in the global economy and geopolitical risk in Korea. As such, the decision has a strong currency flavour in our view. On that note, given the still substantial Korean rate advantage, we expect the USD/KRW to remain heavy, especially as the current account surplus is expected to continue to widen as external demand improves.