Euro Shrugs off Low CPI as USD/JPY Hits 2 Week Highs

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Market Drivers for March 30 2014

USD/JPY hits two week highs

EZ CPI falls to 0.5% four year low

Nikkei .90% Europe .09%

Oil $101/bbl

Gold $1294/oz.

Europe and Asia:

NZD Business Confidence 67.3 vs. 70

AUD New Home Sales 4.6% vs. 0.5%

AUD Private Sector credit 0.4% vs. 0.4%

GBP Mortgage Approvals 70K vs. 75K

EZ Flash CPI 0.5% vs. 0.6%

North America:

USD Chicago PMI 9:55

Eurozone inflation hit a four year low, but EUR/USD refused to buckle on the news while USD/JPY finally cleared the 103.00 level rising to its highest level in two weeks as trading started for the week.

In the EZ the flash CPI reading came in at 0.5% versus 0.6% eyed – a four year low and well below the ECB 25 target rate. The news clearly signals that the region is in the midst of a disinflationary grip as price level continue to decline. However over the week-end BUBA President Jens Weidemann disputed the notion that the EZ was slipping into deflation, noting that much of the price decline has come from lower energy costs and seasonal factors such as the late arrival of Easter.

Mr. Weidemann’s reluctance to admit deflation suggests that the ECB may not make any additional accommodative moves at the upcoming monthly meeting this Thursday. The EUR/USD which dropped initially to a low of 1.3720 on the news quickly recovered and found itself in a vicious short covering squeeze as traders continued to bet that the ECB will remain stationary for the time being.

Part of the reason for the market complacency is the fact that core CPI readings have leveled out at 0.8%. The ECB could point to that number as the reason for staying put for now, but if the data does not show improvement in the next month or two the pressure on the central bank to act will begin to escalate markedly.

Meanwhile USD/JPY was much better bid in Asian and early European trade finally taking out the 103.00 barrier and rising to its highest level in two months. With risk appetite generally positive and with markets anticipating ample QE from the BoE in the wake of the coming tax hike tomorrow the pair appears to be well poised for further gains, especially if it gets some support from US equity markets.

In North America today, the market will get the reading on Chicago PMI data which will serve as a preview of the ISM Manufacturing report. Expectations are for a rise to 59.8 from 58.5 prior and given the beats in Empire and Philly Fed surveys the chance of an upside surprise are good. If the US data proves supportive then USD/JPY could test the 103.50 barrier as the day proceeds.

Boris Schlossberg
Managing Director

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