Currency Markets Look to China CPI, Euro Crisis for Direction Cues

Major Currencies vs. US Dollar (% change)

30 Jul 2012 – 03 Aug 2012

Talking Points

• China CPI, Bernanke Comments Headline Thin Economic Calendar
• ECB Monthly Report in Focus for Non-Standard Measures Guidance
• BOJ, RBA Interest Rate Decisions Expected to See Policy Unchanged
• UK Inflation Report Unlikely to Offer Substance on BOE Outlook

Most major currency pairs continue to show strong correlations with the MSCI World Stock Index, reflecting an intimate sensitivity to sentiment trends. USDJPY is a lone exception, but an iron-clad relationship with the 10-year Treasury yield still anchors the pair to risk appetite given the haven status of US debt. On balance, that keeps familiar big-picture themes – the degree of slowdown in global economic growth and the severity of the Eurozone debt crisis – front and center for the spectrum of major currencies in the week ahead.

On the economic growth front, traders will look to a sparse economic calendar for direction cues. Chinese CPI figures are expected to show inflation slowed to an annual pace off 1.7 percent in July, marking the lowest reading since January 2010. Traders may treat the figure as allowing the PBOC some space for added stimulus after the ECB and the Federal Reserve disappointed hopes for further accommodation last week. China is the third-largest engine of global output after the US and the Euro area (taken collectively), so further easing there has scope to boost market-wide risk appetite. A pair of speeches from Fed Chairman Ben Bernanke round out the docket of big-ticket event risk. Murmurs of a QE3 announcement at September’s FOMC meeting are already swirling and traders will look for confirmation in the Fed chief’s comments, though little new guidance is likely to emerge just days after the last rate decision.

Turning to the Eurozone, all eyes are on Spain after Prime Minister Mariano Rajoy took a small step toward asking for a formal bailout at a press conference on Friday, saying he would condition such a decision on the non-standard measures to contain periphery countries’ borrowing costs being planned at the ECB. For his part, ECB President Mario Draghi has clearly started to plant the seeds for the unveiling of some kind of funding-stress relief. Draghi first brought runaway bond yields into the ECB mandate with a speech in London two weeks ago and then alluded to “non-standard policy measures” to be hashed out in the “coming weeks” at the monthly press conference last week. Details remain absent however and traders will keep a close eye on Augusts’ ECB Monthly Report for any additional guidance.

Elsewhere on the docket, the quarterly UK Inflation Report will help shape expectations of BOE monetary policy in the months ahead. Traders are unlikely to find much beyond a reinforcement of the already familiar wait-and-see posture as Mervyn King and company gauge the impact of the recently unveiled ECTR and FLS programs before tinkering with new ideas. The Reserve Bank of Australia is widely expected to hold rates unchanged at 3.5 percent, with traders pricing a paltry 17 percent probability of another 25bps reduction. The focus will be on the bank’s rhetoric as guidance for further policy, with investors still betting on 75bps in further easing over the coming 12 months. The Bank of Japan is likewise seen holding policy as-is, although further fine-tuning in the bank’s non-standard stimulus programs similar to last month’s reshuffling may emerge

EURO

Source: Bloomberg

Key Event Risk

BRITISH POUND

Source: Bloomberg

Key Event Risk

JAPANESE YEN

Source: Bloomberg

Key Event Risk

CANADIAN DOLLAR

Source: Bloomberg

Key Event Risk

AUSTRALIAN DOLLAR

Source: Bloomberg

Key Event Risk

NEW ZEALAND DOLLAR

Source: Bloomberg

Key Event Risk

--- Written by Ilya Spivak, Currency Strategist for Dailyfx.com

To contact Ilya, e-mail ispivak@dailyfx.com. Follow Ilya on Twitter at @IlyaSpivak

To be added to Ilya's e-mail distribution list, send a note with subject line "Distribution List" to ispivak@dailyfx.com