Currency markets have been relatively quiet this morning in Europe with little newsflow of note to drive markets. Eurozone CPI inflation pushed back up to 1.4% YoY in April, with core inflation rising to 1.2% YoY. Retail sales and consumer spending dipped in April in Germany and France respectively, in Italy the unemployment rate pushed up to 12.0%, while the Eurozone unemployment rate edged up to a new high of 12.2%. EUR/USD sold off a little through the morning dipping to a low of 1.2968, but has since edged back up to the 1.30 area. USD/JPY has edged under the 100.50 level, GBP/USD has been essentially flat around the 1.52 mark. In our view, EUR/USD looks set to close the week above 1.3000 for the first time since early May and some month-end hedge-adjusted buying associated with the 1.1% rise in the world MSCI stockmarket should assist the firmer EUR/USD close. Next week the key EUR focus will be on the June ECB meeting (Thursday). Given the modest month on month improvement in the Eurozone business surveys, we do not expect further ECB easing next week. Nevertheless, a lot will depend on the ECB's new forecasts and the outlook for the expected economic recovery. Any indications that the ECB is moving closer to implementing a negative deposit rate would act as a EUR headwind.
AUD/USD has dipped a little through the European morning but should find some support today for two reasons: (a) month-end AUD buying reflecting the net adjustments to the offshore equity portfolio hedge ratios following a more than 1.1% monthly gain on the world MSCI stock market index; (b) some further trimming of bearish AUD short positions following yesterday’s positive 2nd estimate of 2013/14 capital expenditure plans by Australian firms. The very forward-looking capital expenditure survey supports our (and the RBA’s) core view that Australian business investment is in roughly a twelve month plateau, hence, not generating a large immediate contraction in Australia’s GDP growth. Our early forecasts for next week’s Q1 Australian GDP growth remain close to 1.0% (QoQ). A lift in AUD/USD up to 0.9700 is possible, but solid resistance is likely to be found at those levels. The weekend release of the China May manufacturing PMI will almost certainly influence AUD during the illiquid early hours of Monday morning trade. Expectations centre on a PMI index of 50.0 (previous 50.6). We see a modest risk the PMI is weaker than expected.
USD eased in overnight trade after US economic data disappointed expectations. Today, we receive more partial US economic data which should have a limited immediate effect on the USD. Our central view is the USD should continue to slowly trend higher. The May manufacturing ISM (Monday) and the non-farm payrolls (Friday) are the key US releases next week.
USD/JPY just dipped below our accumulate target of 100.50 in London trading yesterday and this morning. We expect USD/JPY to reach 114.00 by year end and recommend buying USD/JPY on further dips below 100.50. Following consultations with market participants, the Bank of Japan announced further refinements to its bond purchasing program yesterday. The BoJ will conduct auctions more frequently and devote a greater share of their purchases to long term bonds. These changes may help reduce volatility in the JGB market. Japanese industrial production surged by 1.7% in April, well above consensus of 0.6%. A solid increase in industrial production was telegraphed by exports and relatively lean inventories. Japanese industrial production was in a deep recession in 2012 and has only recovered back to the level in June 2012 and is still 16% below the level in February 2008. Capacity utilisation is low and today's CPI showed price pressures are non-existent in Japan.
AUD & NZD Today
Lots of US data on the agenda this morning but focus will be mainly on month-end fix with hefty USD sell signals the theme. Aud was hit lower overnight as rumors that China PMI (out this weekend) will print sub 50 circulated. Large AudJpy selling from model accts during London session taking out key support levels weighed further on the pair . Real money accts remain short aud, but possibility of a pullback looms as market gears up for month end. Consistent with the market we are RHS Aud. Exporter interest today 0.9530-0.9500 where key support sits. Topside is light with nothing till 0.9700.
Similarly to the Aud, risk off and NZdJpy selling has seen Nzd make new lows falling below 0.80c for first time since Sept. However unlike the Aud, there may be more room on the downside given Nzd has lagged the whole Aud move. Our traders remain short Nzd and are looking to add on a bounce to 0.8050 with a stop at 0.8100. Downside is shallow with bid exporter interest 0.7945-50.