Sterling and the Australian dollar are shining in an otherwise dull foreign exchange market on Hump Day. A stronger-than-expected rise in Australian CPI dampened budding speculation of a rate cut and helped lift the Aussie about a cent setting multi-year lows at the start of the week.
In Europe, the BOE's recognition of limited spare capacity and a drop in the unemployment rate to 7.1% (from 7.4%) lifted sterling almost a cent to just above $1.6550. Recall on Monday, sterling had dipped briefly below $1.64. Sterling is also trading at it's best level against the euro since in a year as the euro slips through GBP0.8200.
The euro had begun Asia on a firm note, moving to test the 100-day moving average (~$1.3575) and turned back. This area is becoming increasingly technically important. That average has marked the rally in the euro since mid-2013 and the euro has not closed below it since September, which was the first time since July. Yet, since breaking through there at the end of last week, the euro has been unable to resurface it this week.
The BOJ meeting concluded with no change in policy and Governor Kuroda's press conference failed to provide much fresh insight. The dollar has been largely confined to yesterday's ranges against the yen. A newswire survey found a decline in those expected additional measures by the BOJ in the April-June period from a little over half to a third.
Australia reported headline CPI rose 0.8% in Q4 rather than the 0.4% the market expected. The year-over-year pace increased to 2.4% from 2.2%. The consensus had looked for a decline to 2.1%. More important from a policy making point of view, the trimmed mean measure (a different way to think about core inflation) rose 0.9% and at 2.6% year-over-year represents a two-year high. The market had previously appeared to have discounted almost a 50% chance of an RBA rate cut in H1 14. The perceived odds have been nearly halved.
The Australian dollar shot up quickly on what appears to be mostly short-covering. It ran out of steam near the initial retracement target (~$0.8885) of the slide from the move to almost $0.9100 on January 13 and in front of the 20-day moving average (~$0.8900). Above here, additional resistance is seen in the $0.8920-60 band. Initial support is pegged in the $0.8820-40.
The minutes from the Bank of England meeting earlier this month showed a greater recognition that the economy's spare capacity may be limited, which would seem to warn of the risk of upward pressure on prices. At the same time, it tried to reassure investors that the 7% employment threshold will not trigger a rate hike. It was shortly after that that the UK reported that the ILO measure of unemployment fell to 7.1% from 7.4% in November.
Separately, the claimant count fell 24k in December, a quarter less than expected, and the November decline was revised to 34.3k from 36.7k. Average weekly earnings were unchanged at 0.9% on a 3-month year-over-year basis, unchanged from October, but a little less than the consensus had expected. Tighter labor market conditions is not pushing up wages.
The Bank of Canada will make its policy announcement today and no change is expected. There is some speculation of the Bank's inflation assessment and forward guidance. Specifically, it has elevated its concern about the persistently low inflation. Three months after Carney stepped down to take the BOE post, his successor Poloz dropped the forward guidance that had pointed to a rate hike this year. At the end of the week, Canada will report December inflation figures. Despite soft month-over-month figures, the year-over-year pace for both the headline and core are expected to rise (from 0.9% to 1.3% and from 1.1% to 1.3% respectively). We suspect, given the extreme market positioning (evident in the futures market) a neutral Bank of Canada statement could spur a bout of short-covering in the Canadian dollar.
Meanwhile, Chinese officials injected funds yesterday to ease the liquidity squeeze and key money market rates were fixed lower for the second day. The lower rates ostensibly help spur equity market gains and the Shanghai Composite posted its largest gain in 2-months (~2.2%). Separately, the Ministry of Finance sold CNY24 bln of 10-year bonds yielding 4.45% today. At the last auction in November, the yield on the 10-year bonds was 4.71%.
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