It has been a relatively quiet morning session in Europe. Euro-zone CPI inflation was confirmed at 1.4% YoY in April. There has been little else to report. The USD has generally rallied through the morning, EUR/USD has drifted down to 1.3320, GBP/USD to 1.5625. USD/JPY is holding around 95. Markets await the US open and the next wave of US economic data covering industrial production, TIC flows, current account and Michigan confidence reading. Yesterday’s better-than-expected advance retail sales print helped support sentiment, today’s figures have plenty of potential to influence the USD and markets as well.
Comments from prominent US Fed commentator Jon Hilsenrath in the WSJ suggesting Fed Chairman Bernanke could use next week’s FOMC press conference to temper market expectations regarding Fed policy tightening were key to the bond and USD moves late in the New York session yesterday. As we have indicated previously, the June FOMC meeting is in our view too early for any policy change. Our view is that the Fed tapers its asset purchases in December, stops asset purchases in March 2014 and looks to lift rates in late 2014. We still expect the USD to firm over the medium-term, driven by the US economies relative outperformance, higher US real yields and outperforming US asset markets. However, in the more immediate term, the USD should remain under modest downward pressure as participants continue to pare back expectations for an immediate change to Fed policy.
USD/JPY has lifted off yesterday’s lows below 94.00, but USD/JPY has been unable to maintain gains beyond 95.50. The Japanese sharemarket has been in positive territory today, but the Nikkei index has only recovered around 1/3 of the 6.5% routing yesterday. The firm JPY reflects some disappointment in the lack of action from the BoJ to curb bond market volatility, reflected in BoJ meeting minutes released today. Nonetheless, the minutes did show that the Government “deemed it important that the Bank respond appropriately to the fluctuation in JGB yields.” Note the minutes are from the 21-22 May meeting, not the 11 June meeting. Prime Minister Abe’s cabinet approved new growth strategy measures today, although once again, there were little in the way of details provided. We expect USD/JPY to remain heavy for the remainder of the week.
Abenomics, and the recent financial market volatility are sure to be on the agenda for the G8 Leaders Summit in Northern Ireland next week (17-18 June).
AUD/USD and NZD/USD remain significantly off the mid-week lows. Both have also outperformed on the crosses over the past 24 hours. Given the disproportionate moves lower over recent weeks, we expect both the AUD and NZD can continue to recover some lost ground, particularly against the core currencies such as EUR and GBP over coming sessions, as long as volatility does not spike once again. Despite the negative sentiment, the Australian and New Zealand economies continue to outperform the Eurozone and the UK, and continue to enjoy a significant yield advantage.