Risk continues to rally, but we’re seeing the effects primarily through the equity and fixed income markets. Currencies largely did their own thing yesterday. NZD/USD has suffered on the back of a pause in the rate hiking cycle of the RBNZ. AUD/USD has pulled back from its inflation induced (or China PMI?) surge and began to pull back yesterday. In fact, a quick glance at emerging market FX highlights a general weakness yesterday that belies the exuberance we saw in equity markets as yet again the S&P 500 made new record highs.
I can’t say I’m particularly shocked about Asian currencies (USD/KRW, USD/TWD etc), mercantilist economies have a tendency to be resistant to their currencies appreciating generally, and coupled with the weakness we’ve seen in the Chinese currency this year, and the Japanese yen over the last 18 months, it’s hard to see them standing by and letting nature take its course. For this reason, I’m expecting a EUR/USD bounce or at the very least greater resistance to its continued decline in the coming days, as central banks recycle their intervention dollars to get their portfolios back in line.
USD/JPY did as expected and bounced yesterday, it’s move above last weeks high could be viewed as confirmation of a double bottom from a technical perspective. If that’s the case this upsurge could target the 102.40 area in the first instance. We’ll be observing on the side-lines. Inflation data that came out this morning was broadly flat and continues to be substantially inflationary. What a strange world we live in where rises consumer prices are something to aspire to! God help us if they end up thinking they’ve gone too far..
The move that felt like pain though was sterling. We’ve all seen this so many times before! Sterling has a way of tempting investors into a position and making them suffer for it. One has to concede that the price action has been brutal for advocates of sterling strength, but I wouldn’t be shocked if sterling strength continues and GBP/USD rises like a phoenix from the ashes of short term trading losses. As mentioned in previous blogs, GDP numbers today could see the UK economy surpass the pre Global Financial Crisis peak. I find it hard to believe that that’s going to have any impact on the currency, the numbers are seriously lagging after all. But perhaps it will allow people to take a step back and look at the recovery in British economic prospects from the doldrums.
Other data to enter the macro-sphere today include IFO in Germany, durable goods in the US and money supply data for the Eurozone as a whole.