Markets continued to trade sideways yesterday with little impetus coming from economic data nor with comments from central bankers. As we said yesterday, investors are keenly focused on what happens next week more than this. G10 and emerging market crosses have remained quiet in the overnight session with a slight overall trend of USD strength.
Dollar pulled higher following a consumer confidence number that broached a 6yr high in February. Confidence rose from 78.1 to 82.3 during the month as consumers reported an improving jobs market and improvements to wages. That is not to say that the consumer is now ‘back’, but improved confidence should go hand in hand with an improved consumption of services and retail indicators. Having just spent a week in the US, meeting and speaking with clients, I can verify that the weather was the largest weight on output through the winter and all believe that they will spring back from the slowing during Q2.
As we have hammered on for what seems ages now, should next week’s ISMs show a strengthening in manufacturing and services sectors, and payrolls pull towards the 200,000 mark, then the USD will really start to motor against its crosses.
In the meantime, we must focus elsewhere. UK inflation yesterday matched expectations as it fell from 1.9% the month before to 1.7%. A slight slippage in the rate of price increases is no bad thing and today’s number is the second consecutive number below the Bank of England’s target. Some would think that this is worrying news, but the context of 49 months of above target readings beforehand should stay any issues of extreme disinflation. Sterling strength will have helped pressurise prices lower, the Bank of England is trading off a strong pound for the benefits of some semblance of price security at the moment and this is helping to keep policy expectations from getting too high too fast. Price increases are expected to speed up in the second half of the year as wage increases become stronger and more common, but the near-term view of the price picture is one of calm; not disappointing on the low side, not too aggressive on the high side, and therefore, unlikely to promote much market or central bank reaction.
Euro remained largely unmoved on the day despite the ECB’s most hawkish member coming over all dovish. Jens Weidmann, the President of the Bundesbank, said asset purchases or a quantitative easing program was not “generally out of the question”. While he said he would prefer the purchase of private sector assets and not government debt, these pronouncements do eliminate a mental roadblock to aggressive ECB policy action should further signs of deflation be seen in the coming months. As it stands at the moment, we expect to only see a change in ECB policy following a significant worsening of the inflation outlook.
AUD has neared a 4-month high overnight as volatility investors have been more than happy to sate their yield hunger with commodity currencies this week. As it stands at the moment, AUD is close to levels that Governor Stevens described as “uncomfortably strong”. We expect that Chinese weakness will prick this bubble soon and expect a resumption of pricing below the 0.90 level in AUD/USD terms.
The data calendar remains quiet today. US durable goods orders are expected to bounce back from January’s 1% fall by rising 0.8% in February and we would look for EUR/USD and GBP/USD to continue their recent weakness as a result. Elsewhere we have Italian retail sales at 09.00 and US mortgage applications at 11.00.
