USD – Cue in Bernanke
GBP – Time for BoE Minutes and Retail Sales
EUR – Consolidating Above 1.28
AUD – Main Takeaway from RBA Minutes
CAD – Retail Sales Growth Expected to Slow
NZD – Shrugs Off Stronger Credit Card Spending
JPY – What Amari’s Conflicting Views Say About Yen Sentiment
Data out today will likely show that UK retail sales fell for a second consecutive month and PSNB was £8.1bn in April. The latter is only anticipated to garner a significant market reaction if the shortfall deviates markedly away from consensus estimates. Meanwhile, the release of May’s MPC minutes are expected to indicate no change in the committees recent decision to keep further QE on hold, with the vote pattern remaining at 3-6-0. However, we do acknowledge that a risk that one or two members, including the Governor, may have rejoined the majority following the Bank’s more upbeat economic assessment in the inflation report. There is a broad expectation that new Governor Carny will ease policy soon after his arrival on 1 July. Yesterday’s softer than anticipated April inflation figure provides further support to that view.
Today’s Eurozone current account data won’t receive much attention, but it is notable that this has shown steady improvement in recent months, and the current account is now in surplus by EUR135bn in the 12 months to February. At the same time, portfolio investment is also positive, showing EUR103bn of inflow in the same 12 months. The offsetting flows mainly come form “other” investment, which includes cash, hedging and speculative flow, but in the longer run the combination of current account, FDI and portfolio flow that make up the “basic balance” is better correlated with the performance of the currency. Even though a lot of the improvement in the current account relates to weak Eurozone demand, as long as this is not leading to portfolio outflow it is hard to see it as EUR negative. The EUR consequently looks supported by these flow fundamentals as long as there is no obvious emergence of new reasons to be short.
Fed Chairman Bernanke’s testimony to Congress will be the main event this afternoon. Further clarification on his recent comments indentifying the risks to financial stability from too long a period of accommodative policy will be sought. Three weeks after introducing a more symmetric outlook for future Fed asset purchases, we doubt that the Fed Chairman wants to talk up the prospects of tapering. And FOMC minutes, while slightly dated, will detail the discussions surrounding the latest change to the Fed’s outlook. However, discussion of medium-term risks seem consistent with our view that tapering will occur soon after the economy accelerates, which we expect in H2. US existing home data for April is also due for release.
Eventually, the Fed will presumably withdraw from QE3, and tapering may well start before the end of the year. But the USD has already priced this in by regaining all the ground lost relative to yield spreads that was seen in response to the initial announcement of QE3. We would expect Bernanke to remain broadly dovish in this afternoon’s testimony to the JEC, and that should mean the USD weakens anyway. But if he were to indicate some possibility of tapering over the summer, or if the market were to interpret his comments that way, the knee jerk reaction would certainly be USD positive. But even then, the fact that the USD has already reversed the QE inspired decline suggests the USD upside is quite limited, especially since only Japan is currently undertaking QE. Indeed, the Eurozone is effectively withdrawing QE because the LTRO volumes are being slowly repaid week by week.
