The levitation in equities from the lows seen last Thursday continued yesterday, as the previous head of the Federal Reserve, Mr. Bernanke, gave a boost to risk appetite by advising there would be no need for the Fed’s balance sheet to shrink as the FOMC normalizes policy. Cautionary warnings from San Fransisco’s Fed President John Williams that the Fed needs to be wary of excessive risk and that volatility was more subdued than normal made sure the rally didn’t get out of hand, though the S&P did manage to add 0.38% to its valuation on a light volume trading day.
FX markets were relatively quiet given banks north of the 49th parallel were closed in observance of Victoria Day, although the Aussie did exhibit some notable weakness after Standard & Poors warned that Australia’s triple-A credit rating could be in jeopardy if substantial budget cuts aren’t made in the coming years. On the heels of the critical tone from the S&P, the minutes from the last Reserve Bank of Australia meeting were also released, and proved to be a little more dovish than some had expected given the relatively uneventful statement which was released after the last policy decision to keep rates unchanged. The notes made reference to the fact that the accommodating stance of monetary policy would be appropriate for some time, and that the recent strength in the labour market indicators did not adequately telegraph the subdued state of labour demand. In response to the double dose of negative developments, AUDUSD tested down to the 0.93 level, which finally gave way to a run of stops which drove the pair into the mid-0.92s.
The overnight Asian session saw equities advance despite the Thai army declaring martial law in response to anti-government protests that have left the country without a functioning government. Thailand’s army made a point of assuring its citizens that this was not a military coup, and that the introduction of martial law was a decision made due to deteriorating security that forced the army to declare a state of emergency. The promises from the military that their actions do not constitute a coup has helped stem some of the flight to safety trade, although the Thai Baht did weaken to the levels seen in early May when the government was ousted, before rumors of central bank buying helped calm sentiment. USDJPY leaked lower over the course of the Asian session, with safe-haven flows into the Yen pushing the pair closer to another test of the 200-day moving average at 101.23. This level is significant for the pair as it has not broken lower on a daily close since mid-2012, causing concern the squeeze on JPY shorts could intensify if the moving average fails to hold.
The main event on the economic docket from across the pond this morning was the release of April consumer prices in the UK, which registered the first uptick in the headline reading since June of last year. The headline number printed at 1.8% on a y/o/y basis versus expectations of a 1.7% increase; however, a large portion of the increase was due to an increase in transportation costs, something considered transitory by the ONS because of travel around the Easter holiday. Also mitigating some of the hotter than expected CPI print, producer prices showed notable weakness in input costs, registering a y/o/y decrease of 5.5% (vs. expectations of -4.9%) while output prices also edged down slightly with only a 0.6% y/o/y increase versus the 0.7% analysts had expected. The soft numbers on the producer side of things corroborate the ONS’s claim to the transitory nature of the higher than expected CPI number, and thus have seen GBPUSD kept in check from gaining too much strength; ahead of the North American cross Cable is trading slightly higher in the low-1.68s.
As we get ready for the opening bell in North America, and Canadian traders return to their desks after the long-weekend, equity futures are in limbo at the time of writing, indecisive on whether the bulls or bears will take control at the open. The commodity complex is soft this morning, ceding ground as gold is down over $5/ounce to trade below $1,290/ounce, with copper slipping by 0.66% to change hands just above $314/lb. The Loonie is also trading on it’s back foot, slumping on the poor performance of commodities, the weakness seen in the Aussie, and a wholesale sales number for March that came in far below expectations. The first decrease in 2014 saw the value of wholesale sales decline by 0.4% in March, a far cry from the 0.4% increase that had been expected. USDCAD kicked higher after the release hit the wires, but ran into resistance at the 1.09 handle where the pair has had trouble overtaking throughout the last few weeks. Should the Loonie succumb to further selling pressure, 1.0970 should act as the next level of decent resistance for the pair.
Looking ahead to tomorrow, Pound traders have more economic event risk waiting in the wings, as the Bank of England concludes their monetary policy meeting and retail sales for the month of April are released. It is widely expected that Mr. Carney and the rest of the Monetary Policy Committee will vote unanimously to keep their asset purchase program and the level of overnight lending rates unchanged, while the median analyst estimate is to see retail sales increase by 5.2% compared to the last twelve months. On a monthly basis the forecast is for a 0.5% gain, and would be the third consecutive monthly increase after the 0.1% registered in March, and another sign that the rebound in housing activity is propping up consumer demand as households remain confident in future economic prospects. While the communication from the BoE as of late has traders re-pricing interest rate hikes to a longer time horizon than previously determined as Carney appears to favour a macro-prudential approach to addressing the imbalances in the housing sector as opposed to rate increases, GBPUSD bounced nicely off it’s 50-day moving average and trend-line support last week, with the risk of short-covering shouldtomorrow’s retail sales numbers come in better than expected. Corporates that are naturally short Sterling might want to consider taking advantage of the drop in May to cover off a portion of their exposure, considering the Pound has remained resilient and the likelihood is still that the BoE commences increasing rates before the Fed and BoC.
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