FX Daily Strategy: N America, April 17th
GBP could benefit from higher than expected CPI…
…but we still see upside as very limited given current pricing of rate cuts
JPY in focus as weakness continues
AUD looks to have further downside risk
GBP could benefit from higher than expected CPI…
…but we still see upside as very limited given current pricing of rate cuts
JPY in focus as weakness continues
AUD looks to have further downside risk
UK March CPI was in line with our forecasts but slightly on the strong side of market consensus. EUR/GBP has dipped as a result, once again testing support at the 0.8530 level. There is scope to break below here and test 0.85, but we don’t see scope for any sustained break lower. The UK curve is already pricing quite a hawkish story for BoE policy, with the first rate cut not fully priced until September, and even though today’s number is slightly above expectations, there is every chance that CPI is below 2% y/y by summer. The weak employment data seen yesterday also suggests the BoE may see a case for easing by August or even by the June meeting even though the earnings data and CPI data have come in marginally stronger than expected. Governor Bailey speaks this evening, and may provide some hints on the trajectory of policy. He would need to sound outright hawkish to justify a EUR/GBP move below 0.85, and that was not the tone he took after the last MPC meeting.
Elsewhere, eyes are still on the JPY which weakened against the USD and EUR on Tuesday (although the AUD was even weaker). USD/JPY dipped sharply just after the US equity market open at 14:30, losing nearly a big figure, but at this stage there is no evidence that the decline was a consequence of BoJ intervention. Equities also fell at the open, and we saw weaker commodity currencies as well, so the JPY rise might just reflect risk averse trading. Even so, we are at levels that should make markets nervous about potential BoJ action. The JPY is at extremely low levels – real terms lows in the floating era – and BoJ intervention has typically been effective at extremes. There have been plenty of warnings from the Japanese authorities, and if they allow a break above 155 in USD/JPY and 165 in EUR/JPY without acting, they will lose credibility. So although this dip doesn’t look like it is intervention related, it is a warning about the possibility.
The weakness in the AUD was triggered by the decline in equities and the rise in US yields, and after the break through 0.6450 there looks to be potential to test the lows from last October below 0.63. While some of the equity weakness may be related to geopolitics, we would see it as primarily a consequence of higher US yields. Indeed, the nominal US equity risk premium is still very close to its lows since the GFC, supporting the weakness of the JPY. But the rise in US yields has led to a widening of spreads with the AUD suggesting further downside risk, and sentiment is not helped by weakening global equities.