Aussie Dollar Tests 3 Month Lows

USD: Light Data, Dovish Comments from Yellen
GBP: Resumes its Slide, Down 1% Against EUR
CAD: Third Straight Day of Losses
NZD: Credit Card Spending Rises 0.3%
AUD: Testing 3 Month Lows
JPY: Kuroda Comments Example of Why Yen Will Remain Weak

The UK CPI data will be the main focus today with not a lot else to move the markets, and although in practice we don’t expect any change in the y/y rate, the high rate of CPIU inflation and the lack of monetary policy response to it does underline sterling’s problems. The unusual MPC statement after the meeting last week (in that there is not usually a statement when policy is left unchanged) underlined that even though inflation was expected to remain high, the market should not expect any monetary policy reaction. This leaves UK yields as the lowest real yields of all the major currencies and makes it hard to see sterling making gains on either higher or lower than expected inflation numbers. The pound should consequently be biased lower, with the 1.5630 support in GBP/USD looking vulnerable, but the 0.8645 trendline support in EUR/GBP should be safe enough for now.

UK CPI data for January is unlikely surprise markets. An anticipated rise of 2.7% y/y, represents no change from the previous month. Evidence from the BRC suggested that high street discounting, particularly in clothing and electrical goods was particularly acute. This balances out the effect of rising airfares, which we estimate contributed to a 0.1% rise in January inflation. However, we see food and energy prices, combined with the recent softening in sterling, potentially pushing inflation above 3% by the end of Q2. Although these factors are unlikely to change the medium-term inflation outlook due to be published in the BoE’s Inflation Report on Wednesday, upside risks to their forecast are certain to be cited. Inflation, combined with concerns over supply capacity and risk pricing, look likely to keep the MPC on hold until the new Governor arrives in July.

UK PPI input data is forecast to rise by 1.1% on the month and 1.3% y/y, which would represent the sharpest monthly rise in five months, due to rising commodity prices and a fall in sterling both against the dollar and on a trade weighted basis. Output price inflation looks set to slow to 2.0% y/y this month, with the ‘core’ rate decelerating to 1.3% y/y.

EUR/USD found good support in the low 1.33s, but the lack of movement in forward points and the rising uncertainty about the Italian election makes it hard to see a renewed major advance at this stage. While we do not see any real risks of ECB action to limit the upside in the EUR, Draghi’s comments nevertheless suggested that a further rise in short term rates and/or the EUR would be “monitored”, which suggests it could trigger some response. In practice, Lloyds TSB doubt there will be any ECB action unless the EUR moved substantially higher, but the comments have taken the heart out of the market for now and should limit EUR upside to 1.35.

After general strength at the end of last week the USD returned to a more mixed performance yesterday, falling back against a stronger EUR but once again gaining against this year’s FX weaklings, GBP and the JPY. Once again this reflects rotation in risk appetite rather than any fundamental change, and highlights the more mixed status of the USD this year. However, the USD index has reached a significant resistance area near 80.50 and suggests a downside USD bias from here.

President Obama’s State of the Union address overnight will likely be centred around fiscal policy. Obama looks set to urge a fiscal deal to avoid the impact of a sequestration, which would strip $85bn from spending by end-September and an estimated 0.8% from GDP by end-2013.

The Aussie started the week on down note slipping through the 1.0300 figure amidst very thin liquidity and disappointing economic data. With markets in Hong Kong, Japan and China closed for the lunar new year holiday trading in Asia was marked by choppy conditions with sharp early selloff finally settling into quiet, listless trade.

Australian home loans declined by much sharper than expected -1.5% versus 0.1% eyed while the last month’s data was revised downward to 0.7%. This was the third month in a row of declining mortgage approvals indicating that housing demand Down Under may be cooling. Central bank data show housing credit growth in December dropped to the weakest annual pace since records began in 1977.

The disappointing mortgage data numbers dovetail with the recent economic data from Australia which has shown that broad weakening in aggregate demand. As a result Aussie interest rate futures saw an increase to 54% of another RBA rate cut next month. The market is getting increasingly disillusioned with the Aussie as growth Down Under slows and prospects for further RBA cuts increase.

The Aussie has drifted to a low of 1.0265 in early European trade but so far has held above the critical 1.0250 support level. One key factor in the pair’s weakness may be the absence of PBOC which has been a regular buyer of the currency. With China out for the holiday for most of the week, the Aussie may be especially vulnerable to a selloff. A break below 1.0250 suggests a very bearish technical development and may open the path to a test of 1.0150.

The contents of this report are for information purposes only. It is not intended as a recommendation to trade or a solicitation for funds. The author(s) cannot be held responsible for any loss or damages arising from any action taken following consideration of this information.

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