DY: Euro Finds Bids As Higher Inflation Data Fuels Rate Hike Speculation
Geopolitical tensions have resurfaced in North Africa and the Middle East and this has been the primary driver for risk aversion flows, lower equities and higher oil prices. As a consequence, it is no surprise to see the Swiss Franc outperforming on a relative basis. The Euro has stalled out for now ahead of key short-term resistance by 1.3860, and news that S&P has maintained Greece’s sovereign credit rating on negative watch, and Ireland’s central bank wants a lower interest rate on their EU/IMF bailout package is not helping the major’s cause. However, the market has found bids below 1.3800 following a much higher than expected Eurozone producer prices which helps to fuel additional speculation that the ECB will be forced to respond. We do not agree with this sentiment and continue to see the central bank staying on hold and maintaining current monetary policy.
For now, it seems as though the commodity bloc currencies could be the most exposed going forward, with Kiwi, Aussie and even Cad all offering good reason to be looking for profit taking. The New Zealand Dollar continues to be the hardest hit of the three, with the fallout from the Christchurch earthquake adding to downside pressures in the currency. New Zealand PM Key has said that he would welcome a rate cut from the RBNZ given that the country may slip back into recession from the impact of the earthquake.
The Australian Dollar has also come under added pressure on Wednesday following a weaker than expected GDP print. This in conjunction with an on hold RBA, slightly dovish statement on Tuesday, and softer China data have resulted in the latest accelerated drop below 1.0100. Although the Canadian Dollar stands out as the winner in the group right now, this market has also fallen off of its recent highs against the buck after the Bank of Canada left rates on hold and noted the challenges resulting from the strong Canadian Dollar. Elsewhere, the Pound remains well bid and has once again broken back above 1.6300 on some much better than expected construction PMIs.
Looking ahead, the calendar in North America is healthy, with the key standouts coming from US ADP, Fed Chair Bernanke, and the Fed Beige Book. US equity futures are flat, while commodities consolidate their latest impressive gains. Oil is just under $100 ahead of the North American open, while gold tracks by record highs.
