US inflation supports hawks and USD

Market Brief

In the FX markets the USD was broadly weaker as traders square shorts. Yesterday, US inflation data provided support for the hawks as core CPI came in slightly stronger than expected, although headline reading fell sharply. In addition, Durable Goods Order surprised to the upside. Throw in some comments from hawkish FOMC non-voting member Bullard and your have all the makings of a strong USD rally. After a short period of consolidation, we anticipate the USD will begin to head higher (supported by uptick in yields). In Asia, trading was subdued as the Nikkei was up 0.06%, the Shanghai composite rose 0.36% and the Hang Seng increased 0.10%. European stocks are mixed but DAX index reached a new record high. EURUSD climbed slowly to 1.1217 as traders continued to square shorts following yesterday massive plunge. Despite the current USD weaknesses yesterday EURUSD downside breakout turns the focus on 1.1098 support. USDJPY reverse earlier loss at 119.12 as US yields rebounded and expectations of Fed tightening increased. USDJPY needs to break above 119.96 to see an extension of bullish rally to barrier resistance at 120.50. Australia’s private sector credit increased 0.6%m/m in January just above expectations and prior increase of 0.5% in December. AUDUSD regained earlier loses, rallying to 0.7825. With markets expectations for RBA easing next week rising focus will be on a retest of 0.7780. New Zealand’s building permits fell 3.8% m/m in January while ANZ business confidence was upgraded by 4 points to 34.4 in February. NZDUSD traded in a sideways pattern between 0.7536 and 0.7558 for most of the Asian session.

In an overwhelming majority, German lawmakers signaled that they would agree to the extension of Greece’s bailout plan. However, there is a substantial concern that Athens will fail to live up to their new reform plan. Elsewhere, Bank of Greece Governor Yannis Stournaras said that Athens must quickly reached a final agreement with creditors and reforms to carry on. Stournaras went on to say that should the uncertainty get lifted the Greece economy could remain on path for positive growth this year. Perhaps playing-up the "mediator" a bit in a speech to Bank of Greece shareholders he stated “in order to make the most of this window of opportunity, negotiations with our partners must continue in a spirit of cooperation and trust so that we can soon reach a final agreement that will be mutually beneficial.” We are deep concern with the ability of the new Greek government to move forward with reform measures and expect European will be in the same position in four months. This political uncertainty combined with policy divergence underpins our bearish expectations for EURUSD.

Wealth of data was released from Japan. Japan’s industrial production jumped 4.0%m/m in January stronger then expected growth of 2.7%, and previous 0.8% rise in December. This was the fastest acceleration since mid-2011. On the other hand retail sales fell -2.0%y/y in January again expected fall -1.2%. On the inflation front, Japan’s CPI rose 2.4%y/y in line with expectations, while annual core inflation was up 2.2% in January falling from 2.5% in December. CPI excluding food and energy rose 2.1%yoy in January. Tokyo’s CPI rose 2.3%y/y against market expectations of 2.2% rise. Inflation trend is now moving downwards indicating that by September we should see BoJ move forward with additional QQE.

On the docket today we have flash German HICP inflation, Swedish Q4 GDP, Norwegian unemployment, US Q4 GDP, Consumer Sentiment, and plenty of Fed speakers. Participating at Monetary Policy forum, Fed Vice Chairman Fischer, NY Fed President Dudley and Cleveland Fed President Mester.