Market Drivers for May 21, 2013
RBA minutes show no further inclination to cut
UK Inflation materially lower than expected
Nikkei 0.13% Europe -0.82%
Oil $96.58/bbl
Gold $1353/oz.

Europe and Asia:
AUD RBA Policy Meeting Minutes
JPY All Industry Activity Index -0.3% vs. -0.3%
NZD RBNZ 2-Year Inflation Expectation
NZD Credit Card Spending 4.0% vs. 3.7%
GBP PPI Output -0.1% vs. 0.2%
GBP CPI 2.4 vs. 2.8%

North America:

Weaker than expected inflation data sent cable tumbling in early London trade today as investors feared that lack of price pressures would provide the BoE with more leeway to increase QE. Sterling fell to a low of 1.5163 coming within a few pips of testing the 1.5150 support before stabilizing a bit at 1.5175.

The UK CPI printed at 2.4% versus 2.8% eyed while the core reading dropped to 2.0% this was the lowest reading since 2009 and suggests that the UK economy may have finally beaten the chronic inflation that has plagued it for the past four years. Although the news on the price front should ultimately prove positive for the UK economy as it will likely improve real growth and lower costs for the UK consumer, the currency markets reacted negatively to the news.

Forex traders feared that the lack of pricing pressures may encourage the incoming BoE chief Mark Carney to increase the size of the QE program in order to further stimulate growth. However, with UK economic data already showing a rebound, Mr. Carney and the rest of the MPC may feel little need to increase QE for now. Tomorrow’s UK Retail Sales may prove key to the direction of GBP/USD. If the data which is expected to increase from the month prior, surprises to the upside, cable could quickly recover its losses and head towards the 1.5300 as the combination of lower inflation and better growth will assuage any market concerns.

Meanwhile in Japan, the economy minister Amari backpedaled from his comments on Sunday, saying that they may have been improperly translated into English. Mr. Amari said that he “hoped that exchange levels will settle so they match the basic strength of the Japanese economy” but added that he “won’t comment on whether it has in fact been corrected, or to where it would be corrected, or whether (the correction) is over.”

This idea was then further reinforced by a WSJ article which quoted unnamed sources amongst Japanese policy makers who stated that they were ready for more yen weakness with one senior official saying that, “ “the weaker yen provides more benefits than harm for the economy overall.” The net impact of this news was a swift turnaround in USD/JPY trade with the pair as bid today as it was offered yesterday.

However, despite the positive news flow USD/JPY still could not climb above yesterday’s highs and remains capped under the 103.00 for now. The markets are no doubt waiting for tomorrow’s testimony from Fed Chairman Ben Bernanke to see if the Fed policy is starting to shift to a more neutral stance.

Lastly, the RBA minutes last night essentially reaffirmed much of the statement and offered no evidence that the Australian central bank is thinking of cutting rates further in the foreseeable future. Aussie rallied in the aftermath of the release but the move above .9800 soon fizzled as fresh sellers pushed the pair back below the figure. Still, Aussie appears to have stabilized at the 9700 level and is likely to consolidate for the time being.

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