Market Drivers for May 20 2014

Cable takes out 6850 on inflation but retreats

Aussie slides through 9400 as RBA jawbones

Nikkei 0.49% Europe .44%

Oil $102/bbl

Gold $1291/oz.

Europe and Asia:

EUR German PPI -0.1% vs. 0.0%

GBP CPI 1.8% vs. 1.7%

North America:

CAD Wholesale Sales 8:30 AM

Both the euro and Aussie were lower in Asian and early London trade today while cable held its own as UK CPI data came in a bit hotter than expected. The Aussie was the weakest major against the buck as a combination of lower iron ore prices, rumors of S&P rate cut and constant jawboning by the RBA combined to push the pair to session lows of 9256 before it finally found some support.

Although the S&P clarified its statement in overnight trade, saying that there was “less than 1-in-3 chance” that Australia would lose its AAA rating, the currency nevertheless drifted lower all night long as the mere threat of a downgrade was enough to push speculative flows out of the unit.

The decline was further accelerated by comments from RBA Deputy Governor Debelle who noted that “lower capital inflows may result in a lower Australian dollar.” The RBA continued to remain generally cautious on the economy, stating that, “overall growth in coming quarters was likely to be below trend given expected slower growth in exports, the decline in mining investment and the planned fiscal consolidation.”

The sentiment in Aussie has clearly turned negative over the past few days, especially as iron ore prices declined below $100/ton. To add salt to a wound, China’s Vice Finance Minister said that global economic recovery was “extremely slow” suggesting that Chinese demand was not going to pick up any time soon. With AUD/USD having failed at the 9400 level the pair could now correct towards 9200 over the next week as speculative flows exit the pair which they now view with caution on fears of possible further rate cuts by the RBA should economic conditions Down Under weaken further.

Meanwhile cable held its own for most of the night staging a sharp rally towards 1.6850 ahead of the UK inflation data as markets anticipated a hotter reading. The CPI did print a bit stronger than expected at 1.8% versus 1.7% eyed, but the PPI numbers were actually lower with Output readings coming in at 0.0% versus 0.2% forecast. Overall the inflation data was mixed and cable quickly backed off the highs dropping to 1.6830 by mid morning London trade.

The pair, however, continues to demonstrate relative strength as it holds above the 1.6800 figure. Despite last week’s assurances by the BOE that rates will remain stationary for a considerable period of time, the market continues to price in the prospect that the BoE will be the first G-7 central bank to hike rates since 2008 credit crash. When North American markets open for business, traders may try to lift cable through the 1.6850 once again.

In North America today, the economic calendar is absolutely barren and currencies may take their cue from bonds once again. US 10 year yields continue to hover just above the 2.50% level where they appear to have found some support. That is likely to keep the buck relatively well bid for the day, but if yields begin to drop, the greenback is very vulnerable to a further selloff especially in USD/JPY where shorts are likely to test the 101.00 barrier once again.

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