Forex Investment and Currency Trading

FX Fundamentals: While we would still argue that the market is pricing in too much tightening form the Fed, yesterday’s retail sales data certainly provided some justification for the rise in yields seen in the last few weeks. The data underlined that consumer demand in the US has been resilient, and that US yields are very accommodative given what is currently only a fairly modest slowdown. It is uncertain how much of the resilience in retail sales is due to the rebate cheques that were sent out in May, but while this may have had some impact, the upward revisions to previous months suggests there is more fundamental strength. Today’s CPI data will provide some idea of how much of the strength in sales is simply a response to higher prices, but whether the strength is real or nominal, it underpins the rise in US yields. In fact, it could be argued that real strength – i.e weaker CPI - would provide more reason to see scope for Fed tightening that higher CPI, which would indicate weaker real growth. In practice though yields are likely to rise as usual on strong numbers, at least initially, although with us 2 year swap rates now at 4%, upside is becoming more limited. Key levels broke overnight in EUR/USD overnight. If a no vote in Ireland is confirmed, a dip through 1.5290 looks likely.

The G8 meeting in Osaka at the weekend is also a focus, but is not expected to produce any official statement on FX, so there is little scope for any major boost to the USD from a positive statement. There may be more concern expressed about energy prices, but with Russia involved outright opposition to energy price strength seems unlikely, and any concrete action to control the oil price also should not be expected at this stage. There will be some interest in the Saudi convened meeting of oil producers and consumers on June 22 as having potential impact on the oil price, but proposals to reduce speculation seem unlikely to have a major impact.

FX Technicals: EUR/USD – a fall through the 1.5395 converging interweek range lows opens the floodgates for a run at the key 1.4985/65 level (intermediate supports 1.5285/1.5165). For today, resistance at 1.5485 (max. 1.5540) should cap any corrective squeezes.
Emerging markets
Peru April GDP (consensus 10.0%, prior 5.6%), May Unemployment (consensus 8.7%, prior 9.0%), Colombia April IP (consensus 6.5%, prior -9.4%), April Retail Sales (consensus 4.8%, prior 0.01%).

In Peru, the BCRP hiked its reference rate to 5.50% from 5.75%. While the Bloomberg survey indicated that the majority of analysts expected no change, there was a clear change of sentiment among analysts and local traders a couple of days prior to the decision. Indeed, the combination of the hike by Chile’s BCCh and the strong growth of the Peruvian domestic demand, pushed many analysts to correctly expect a hike. Also, the adoption of certain capital controls has weakened the PEN and substantially eliminates the FX appreciation risk following the rate hike. The BCRP hiked because it wants to curb the increase in inflation expectations that are being contaminated by the negative supply shock affecting inflation. While further hikes in the remainder of the year is not ruled out, market believes the BCRP will first evaluate the effects of the recent move on inflation expectations before deciding its next potential rate hike.