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Inflation and Interest Rates
There was a tick up in the euro zone composite PMI to 56.3 from 55.5 in December, but it has had little effect on the euro, as new session lows were recorded in late morning turnover in London. The emphasis on the euro’s recovery over the past two weeks, has been shifting interest rate expectations.
In the Wall Street Journal, the ECB President commented that higher commodity prices are not translating into wage increases. This means that he would have to overlook the temporary jump in inflation.
Forex News
The US dollar took a wrong turn against most major and emerging market currencies today. The Euro has broken through and rallied in short-term trading. There is some speculation that the EU will intercede for Greece and provide aid, but it seems very premature and would undermine the austerity plan in place for Greece and would not allow them to implement it. This would surely cause a ripple for Spain, which is unwelcomed.
FX Daily Squawk
The Japanese Yen and the US Dollar have recouped some losses from yesterday against the major currencies. The Yen crosses took advantage of the Yen and US Dollar today. Canadian CPI was lower than expected (CPI fell – 0.3% m/m vs. -0.2% exp, but there was limited impact on the Canadian dollar which remains near the day’s lows vs. the US Dollar.
FX Daily Squawk
The US dollar is recouping some of its recent losses, as momentum traders cut back on their positions due to this week’s major events. Rumors about the impending stress test results indicate that Bank of America will be required to raise $34 billion in capital. They also say that Bank of America may raise the $34 billion in capital by selling its stake in China Construction Bank, as early as Thursday. This is probably another reason why momentum traders have cut back their positions. The Pound and the Aussie got enough of a boost to jump off their lows, but not enough to retest their high’s from yesterday. The boost came after reports of bettern than expected UK PMI services data and Australian retail sales and trade data.
World equity markets are mixed. In Asia, financials pushed the Hang Seng up 2.53%. The CSI 300 rose 1.42%. Japan is still closed for Golden Week.
Currency View for the Week
Jan 27
Posted by John Taxiarchos
The force that has been driving the US dollar thus far, shifts in inflation expectations and relative yield changes, will remain present for the rest of the week.
Euro zone CPI is expected to rise again this week. This could provide some momentum for the ECB meeting on Thursday. Further Euro gains may be attained if the CPI is in line with consensus.
The UK GDP instilled fear of a slowdown, as household spending and consumption remain weak. Weak housing data will cause a possible selloff. The Sterling will also be sensitive to the slowdown in Chinese PMI, which is expected to be moderate.
The Yen will continue to be the most sensitive currency on interest rate differentials versus the dollar, where strong US data prints this week may provide the dollar a break from January’s high near JPY84.00.
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