AUD Jumps As Euro In The Dumps − BOE In Focus

 | Jul 23, 2014 06:33AM ET

EURUSD broke to new lows for 2014 yesterday on no specific development and was much more about euro weakness than it was about USD strength. The euro weakness was particularly noteworthy, given the slightly lower-than-expected core US June CPI data release yesterday. The EURUSD break lower points towards 1.3250/00 as pointed out yesterday, as long as the 1.3500 area resists any rally urges. Elsewhere, the action was muted outside of the AUD, which leapt on a higher-than-expected core Q2 CPI reading (the Reserve Bank of Australia’s favourite “trimmed mean” measure). There is some support for the move in the short end of the Australian rate curve, as two-year rates are up about 6-8 bps from recent lows, though the drivers for AUD seems to be from another source than central bank policy. Reserve manager accumulation and carry trading versus the euro are two possible sources of the buying, as well as a further unwinding of bets that the RBA will ease policy from here – the 12-month forward rate anticipation is around -5 bps versus the -15 bps low last week.) Bank of Japan deputy governor Hiroshi Nakaso was out saying that “the conquest of deflation in Japan is now in sight”, though the BoJ is only halfway to its goal in its estimation. He signalled that the BoJ will be willing to look through a period of lower inflation in coming months due to the base effect of the energy price spike last year, but that inflation will subsequently accelerate again toward the 2 percent target. He also said that recent spending weakness due to the shift in demand created by the April 1 VAT increase is in line with BoJ expectations. All in all, this is JPY supportive as it suggests the BoJ remains sidelined for now and is willing to look through some more weak data before making any new policy hints, as long as bond markets globally remain stable. The interesting situation for the JPY at the moment seems to be that risk on doesn’t harm the currency while risk off inflicts major damage. The euro is clearly the preferred carry currency of the moment, and I wouldn’t be surprised if a nasty bout of risk off – (these are a rare breed lately – but they will never go extinct!) – sees a surprise rally in the Euro, at least in crosses like EURAUD. New Zealand Finance Minister Bill English was out arguing that the kiwi is “unsustainably high” and the “almost anyone who has looked at it comes to the conclusion it’s … 10-15 percent overvalued”. I agree, but the kiwi bears need some risk-off and/or developments that further dampen expectations for Reserve Bank of New Zealand hikes to get downside traction. Still, the strong AUDNZD rally of late suggests the momentum in the kiwi bull market is fading. On that note – let’s see what the RBNZ has to say about the situation tonight. Looking ahead The Bank of England’s Mark Carney will be out speaking, but this is at a “Commonwealth Conference”, so likely no new policy hints. The more important sentiment test for GBP arrives with the BoE minutes up at 0830 GMT today, as we look for more colour on the MPC members’ stance on the degree of slack in the economy and the possible timing of the first rate hike, which is currently priced for around the end of this year. Chart: GBPUSD The GBPUSD chart has traded nervously around the 1.7060 pivot area (the old high) and looks to rush either up or down sharply on today’s BoE minutes release, with the risk perhaps skewed a bit more toward downside volatility if the minutes prove less hawkish than expected, given recent USD strength versus the euro and the long GBP positioning in the market – though certainly signs of hawkish members arguing for moving the first rate hike forward could see the pair zipping back up into the higher range.