Risk FX Bid Ahead of Bernanke Testimony

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Market Drivers July 17th, 2012
Risk remains bid ahead of Bernanke
UK inflation tame, ZEW weaker but in-line
Nikkei up 0.35% Europe up 0.74%
Oil at $88.57/bbl
Gold at $1597/oz.

Europe and Asia:
AUD Reserve Bank Board Minutes llok to remain on hold
NZD CPI 0.3% vs. 0.5%
EUR Eurozone ZEW Survey
GBP CPI 2.1% vs. 2.3%
GBP Retail Price Index 2.8% vs. 3.0%

North America:
USD CPI 8:30
USD Net Long-term TIC Flows 9:00
USD Industrial Production 9:15
USD Fed Bernanke Monetary Policy Report to Senate 10:00
CAD BOC Rate Decision

Risk FX remained generally well bid in Asian and early European trade today as currency markets looked ahead to testimony of Fed chief Ben Bernanke as he was set to testify to Congress about the state of the US economy. Yesterday’s very weak US Retail Sales numbers sparked hopes that the Fed may consider further monetary easing in order to keep the US recovery alive as risk assets rallied across the board.

The bid tone continued through Asian session trade with EUR/USD rising through the 1.2300 level while Aussie managed to spike above 1.0300 before retreating slightly off its highs. The latest RBA minutes revealed that the Australian central bank remains content with the current state of monetary policy, noting that the slowdown in China was not as severe as the market had initially thought. The minutes suggest that the RBA is inclined to remain stationary at the next meeting in August, although swap markets continue to price in high probability chance of another 25bp rate cut.

In UK inflation data printed markedly lower in June with CPI declining -0.4% on a month over month basis while rising only 2.4% versus 2.8% forecast on an annual basis. Core CPI declined to 2.1% from 2.2% month prior while RPI printed below the key 3.0% at 2.8% for the first time in more than 2 years.

Overall this was the tamest set of of UK inflation numbers since the end of 2009 suggesting that inflationary spiral that has plagued the country even as its economy continued to contract may finally be broken. The decline in price pressures was lead by lower clothing, footwear and transportation costs as summer discounts helped ease inflationary levels.

The data should prove to be welcome news to UK monetary officials providing them with greater leeway to stimulate growth via more accommodative policy as inflation concerns continue to recede into the background. BoE Governor Mervyn King is set to speak later today in front of the UK Parliament where he may reveal further details about the BoE lending scheme to increase credit to small and medium businesses. Mr. King is also likely to face sharp questioning over the LIBOR scandal as he faces the lawmakers.

In Europe the ZEW survey printed in line with expectations dropping to -19.6 versus -16.9 the month prior as investors remained concerned over the chromic problems in periphery sovereign debt markets and the clear slowdown in economic activity in the region. However, after the briefest of dips the euro retuned above the 1.2300 level as currency markets remain primed for any dovish comments from Fed Chairman Ben Bernanke. If Dr. Bernanke does hint that the Fed may ease further in the near future, the pair could easily rip through the 1.2400 figure as short covering could create a massive squeeze rally, but if the chairman sticks to his script the disappointment could push the EUR/USD back to a test of yearly lows as speculators quikly dump their longs.

Boris Schlossberg
Managing Director

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