Euro Pops, Aussie Drops As FX Vol Returns

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Market Drivers for April 23 2014

AU CPI misses taking 1 cent off Aussie

GE EZ PMIs pull Europe higher, EUR/USD rallies to 1.3850

Nikkei 1.09% Europe -0.27%

Oil $101/bbl

Gold $1284/oz.

Europe and Asia:

AU CPI 0.6% vs. 0.8%

EZ PMI 53.1 vs. 52.7

UK MPC 0-0-9 wide range of views

UK PSNB 4.9B vs. 8.9B

North America:

CAD Retail Sales 8:30 AM

USD New Home Sales 10:00 AM

Euro popped through the 1.3850 barrier in morning European trade today after EZ Flash PMI printed better than expected allaying fears that ECB would have to resort to a more accomodative policy in order to stimulate growth in the region. EZ PMIs came in at 53.3 versus 53.0 eyed for manufacturing and 53.1 versus 52.7 for services. The gains were led by German readings which were considerably better than forecast.

In Germany the Services PMI rose to 55 from 53.5 expected and the manufacturing PMI rose to 54.2 versus 53.9 projected. The results were markedly better than consensus view and were especially good given the geo-political tensions in the region. The one dark spot was the data from France which saw the PMI readings decrease to 50.9 and 50.3 respectively, but even in France the PMI remained above the 50 boom/bust line indicating that the EZ economy continues to expand.

With overall PMI readings better than forecast, the ECB has little reason to act now and the central bank is likely to remain stationary for the time being despite the deflationary pressures that persist. EZ monetary officials are becoming increasingly concerned with the strength of the euro which they feel contributes to the downward pressure on prices and could hamper exports going forward. So far however, the EZ economy is seeing little negative impact from the strong currency and all of policymakers jawboning is falling on deaf ears as the markets continue to bid euro higher.The pair cleared the 1.3850 level and may now make a run towards 1.3900 as the longs continue to squeeze out the shorts.

Meanwhile in Australia the news was not nearly as benign with AU CPI falling to 0.6% from 0.8% eyed. The downward surprise knocked a full penny off the Aussie as traders pared any expectation of tightening from the RBA. The containment in price pressures was no doubt due in large part to the strong currency and plays well into RBAs policy of status quo. Given the low inflation and the steady growth the RBA is likely to remain stationary keeping Aussie essentially rangebound between 9200-9400 for the time being.

Although Ukraine has not been a factor over the past few weeks, today’s comments by Foreign minister Lavrov that Russia will respond to the attack on its interests in Ukraine rattled the market in late morning European trade sending USD/JPY lower by a quarter of a yen. The tensions in Ukraine have been seething for the past week and the escalation of violence, along with failure of efforts to resolve the dispute diplomatically has set the stage for a possibly much more serious confrontation in the near future. For now the market remains relatively non chalant as most traders do not believe that Russia will initiate a full military invasion of east Ukraine, but if such scenario were to occur risk aversion flows are likely to spike and USD/JPY could revisit the recent lows at 101.50

Boris Schlossberg
Managing Director

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