Euro-zone QI GDP estimates were the main interest to start the day. Estimates for France and Germany set the ball rolling early in the morning and both undershot expectations slightly. French GDP contracted by 0.2% QoQ in QI, following a 0.2% QoQ contraction in QIV 2012 thus ensuring that France has recorded a technical recession. A little while later, German numbers showed the economy growing in QI, but only by 0.1% QoQ as opposed to the 0.3% QoQ consensus expectation. The EUR sold off and dipped down under the 1.29 level early in the session. When aggregate Eurozone GDP estimates were published at GMT10.00, these also missed expectations marginally. The Eurozone economy shrank by a further 0.2% in QI, its 6th successive quarterly contraction in a row. Annual GDP growth dipped to -1.0% YoY, a new low. Both Spanish and Italian GDP contracted by 0.5% QoQ in QI. However, this disappointment was already in the price and EUR/USD ignored the release. The pair has continued to hover around the 1.29 level through the morning ahead of this afternoon’s US data releases.
A little while later attention focused on the BoE Inflation Report press conference. The event was notable mainly due to the fact that it was BoE Governor King’s last ever press conference before retirement at end-June. GDP and inflation projections were little changed, the general message from the press conference was as expected. Growth is expected to accelerate gradually over the next couple of years, inflation will remain above target but drift lower to target in 2 years time. Main currency market impact occurred when Mr. King acknowledged that a “recovery is in sight” for the UK economy and added that UK GDP growth is “accelerating to 0.5%” QoQ this quarter. GBP/USD spiked up to a session high of 1.5273. However, a little while later Mr. King’s admission that “negative rates remain an option on the table” triggered a reversal and GBP/USD dipped back down to 1.5220 where it is trading currently. The door to more stimulus remains open, the BoE will report back on forward guidance in the August Inflation Report. GBP has dipped by 2.3% against the USD this week. As we have outlined previously, the underlying dynamics in the UK, such as negative UK real yields, a large UK current account deficit (3.7% of GDP), a relatively weak underlying UK economy and the ongoing risk of further Bank of England (BoE) policy stimulus suggest GBP should ease over coming months. When overlayed with the prospect of a firmer USD, a strategy of selling into GBP/USD rallies remains appropriate
AUD/USD has remained heavy in Asian and European trade, largely reflecting a firm USD, rather than any specific reaction to yesterday’s Budget or today’s Q1 wage data. In the wake of the Budget, S&P and Moodys reaffirmed Australia’s AAA credit rating and maintained a stable outlook, with Moodys stating that the ‘projected deficits are relatively small’. See the three key points below for more details on the Australian budget. The recent “weakness” in the AUD mainly reflects USD strength because some market participants believe the Federal Reserve may soon signal a tapering of asset purchases (US 10 year bond yields have increased by 30bps since the end April). We expect a speech by Federal Reserve chair Bernanke on the economic outlook and the FOMC minutes, both on 22 May, to dampen speculation the Fed will soon contemplate tapering asset purchases and lead to a softening in the USD and consequent firming in AUD. But before Bernanke speaks next week, there is room for AUD to ease further to 0.9828 if US bond yields keep rising. Expectations are already low for US April industrial production (-0.2%, released at 09.15 EST/2.15pm BST), consistent with a mid-year economic slowdown. In our view, the risk is for an upward surprise in US industrial production and a stronger USD.
NZD/USD has traded around 0.8200 today, and is unlikely to be influenced significantly by the New Zealand Government Budget 2013 tomorrow (from 10.30pm EST/3.30am BST). Budget 2013 will continue the Government’s approach of achieving an OBEGAL surplus in the 2014/15 year through modest spending restraint. The 2012/13 deficit is likely to come in smaller than previously forecast, thanks largely to higher than expected tax revenues. There is potential for the Treasury’s nominal GDP forecasts to be revised lower given recent soft CPI outturns. Such a revision would adversely impact the operating balance. The Crown’s costs related to the Christchurch rebuild are also likely to be revised higher. We do not expect any ratings change in the wake of the Budget.