FX risk trends favored safety-plays earlier overnight before a shift in U.S stimulus expectations drove risk currencies higher, following a soft U.S retail sales report. Retail sales fell 0.5 percent in June falling short of the 0.2 percent rise expected. Market’s are looking squarely to Federal Reserve Chairman Ben Bernanke to signal an increased likelihood the Fed will embark on another round of quantitative easing ahead of his two-day testimony to congress, commencing Tuesday. Any indication the U.S economy is stammering has shifted the balance in favor of further Fed easing, which is naturally a regressive theme for the U.S dollar. Despite the reactive nature of Fed stimulus expectations on currency, the overall backdrop remained negative with further global growth concerns pressuring stocks from both sides of the Atlantic while the safety of U.S debt drove yields to near record lows. The DOW and S&P closed down 0.39 and 0.23 percent respectively.
After looking decidedly vulnerable in early European trade, risk currencies sprung back to life in the ensuing period of the U.S retail sales report. The Euro managed to squeeze out solid gains rising to highs of 1.2290 while commodity bloc the Aussie and Kiwi rallied from intra-day lows hit prior to the release. Sterling led the charge higher against the greenback and posted a fresh 3.5 year high against the Euro.
Earlier, Euro-Zone consumer prices declined 0.1 percent in June, representing yearly growth of 2.4 percent. Core inflation which excludes volatile food and energy prices rose 1.6 percent on year. Both gauges were unchanged from May and in line with estimates. The ECB’s is mandated to keep inflation below, but close to, 2 percent over the medium term. The German Constitution Court has scheduled their ruling on the European Stability Mechanism will take place on September 12. Although leaders remain optimistic of an eventual positive result, it remains another potential source of contention and uncertainty at such a critical time.
Locally, the focus will turn to the release of the RBA minutes for the policy meeting held on July 3. Although we anticipate the usual clue hunting to promote short-term noise on the local unit, in light of the recent less-than-inspiring employment data, the minutes may need to display a direct link between the likelihood of further rate cuts and deterioration in employment to spark a material shift in policy easing expectations. In short, although the minutes may show the RBA have the ample breathing space to ease monetary policy further, the full impact of previous easing initiatives has yet to filter through the economy, suggesting the board will maintain a steady course while assessing conditions both locally and abroad. Across the Tasman, Kiwi traders will be watching the release of second quarter CPI at 9.45AEST.
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