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  • Friday goes out with a whimper
  • Commodities looking to China data this week
  • UK PPI throws more confusion into rate debate

Guest post by FXPro

Overall, the risk environment remains positive in FX.   Even the 11th hour agreement on the US budget elicited barely a response from the USD, with the dollar index making a new low for the year during Friday’s session and holding onto these lower levels during Asia trade.   The foci for the coming week are the major data releases on growth and inflation coming out of China.   The tightening of rates in China seen early last week was taken by some as pre-empting another firm reading on CPI, so markets should at least be prepared for some disappointment on the inflation front.   Elsewhere, the attraction of yen carry trade is best illustrated by the 15% appreciation of the Aussie dollar vs. the yen over the space of less than four weeks, whilst there appears to be no stopping silver.   It’s easy to point out the risks in what we are seeing but, for now at least the search for returns continued faithfully in a weak yen and US Fed accommodation are easily dominating.


Commentary

Friday goes out with a whimper.
Considering the week that it was, Friday was a decidedly subdued end to the week in FX.   With both gold and the Aussie carving out new highs early on during the Asia session, there was little impetus to new risk on the table ahead of the weekend.   Furthermore, given the uncertainties surrounding the potential US shut-down from midnight, it appeared that most were content to sit on the sidelines to see whether 40% of the US economy was going to grind to a halt.


Commodities looking to China data this week.
Silver has put on another 30% during the first three months of the year, compared to 3.5% for gold.   Furthermore, according to Bloomberg data, physical gold holdings in ETF funds, which peaked in December last year, have remained pretty flat over the past two months, suggesting little appetite on the part of investors to ride this latest wave.   In contrast, ETF holdings of silver have risen 6.5% over this period, indicating that much of gold’s recent price action has been the result of gold being pulled higher by the price action elsewhere, principally silver This week could well be a pivotal one for the wider commodity markets, given that China will release a slew of data, including GDP and CPI. With rates having risen once again this week, there is growing evidence that the authorities are waiting to clamp down on rising inflation, with signs that this is impinging on some of the industrial commodities. More evidence of this may not halt silver’s rise, but would certainly take some of the wind from its sails.

 

UK PPI throws more confusion into rate debate. The March PPI data was firmer than expected, which knocked sterling from its perch after a push higher at the start of the European session on Friday.   The rate of increase of input prices held steady at 14.6%, whilst output prices rose further to 5.4% (from 5.3%), against expectations of a fall to 5.1%. The data perfectly illustrate the price pressure which the BoE is keen to contain, but the weak growth outlook and continued high unemployment are acting as a constraining factor for the hawks.  


Looking Ahead

Monday: FR: Industrial Production Feb (expected 0.4%, previous 1.0%)
Tuesday: UK: Total Trade balance Feb (expected – £4.0bln, previous – £3.0bln), CPI March (expected 4.4%, previous 4.4%), GE: ZEW survey sentiment March (expected 12.0, previous 14.1) US: Trade Balance Feb (expected -$44.3bln, previous -$46.3bln), CA: Bank of Canada rate decision (expected steady at 1.0%)
Wednesday: FR: CPI MoM Mar (expected steady at 1.8%), UK: unemployment chance (expected -3k, previous -10.2k), unemployment rate Feb (expected steady at 8.0%), Avg. weekly earnings Feb (expected 2.6%, previous 2.3%), US: Retail Sales Mar (expected 0.5%, previous 1.0%), Retail Sales less Autos (expected 0.7%, previous 0.7%), Business Inventories Feb (expected 0.8%, previous 0.9%)
Thursday: EZ: ECB Monthly Report, US: Initial Claims (previous 382k), PPI Mar (expected 1.1%, previous 1.6%), PPI core (expected 0.2%, previous 0.2%)
Friday: CH: GDP Q1, CPI Mar YoY (expected 5.2%, previous 4.9%), Industrial Production Mar (expected 14.0%, previous14.9%), Retail Sales YoY Mar (expected 16.5%, previous 11.6%), JP: Industrial Production Feb MoM (previous 0.4%), EZ: CPI Mar YoY   (expected steady at 2.6%), Trade Balance Feb (expected EUR -3.6bln, previous EUR -3.3bln), US: CPI YoY (expected 2.6%, previous 2.1%), CPI Core YoY (expected 1.2%, previous 1.1%), Industrial Production Mar (expected 0.5%, previous -0.1%).

Source: Bloomberg

Simon Smith, Chief Economist