It has been another slow news day as traders await the three key risk events for the week, beginning with the ECB meeting tonight. Equity markets are fairly flat and global bond yields have nudged up from recent lows. CAD and AUD book-end the currency leader board, with CAD weaker on lower oil prices and AUD higher on economic data.
The only price action of note overnight was a chunky fall in oil prices, with WTI crude down almost 5% to below USD 46 per barrel, its lowest level in four weeks. This followed a US EIA report showing a surprising rise in oil inventories, the first in nine weeks, and rising gasoline inventories as well. USD/CAD is up 0.5% to 1.3515, making CAD the biggest loser for the day.
The AUD has managed to sustain the gain it saw yesterday, following a soft GDP outcome, but not as weak as some feared. The currency has spent most of the night hovering around the 0.7550 mark in a tight range. The NZD has also been tightly range-bound and met some resistance just above the 0.72 mark, as it did the previous session. It currently sits just under 0.72. NZD/AUD fell about 50 pips after the Australian GDP release and has since hovered around 0.9510-0.9540.
EUR saw some intra-day volatility following a Bloomberg report that the ECB’s draft projections now show CPI inflation at roughly around 1.5 percent each year in 2017, 2018 and 2019, down from around the previously projected 1.6-1.7% level. This saw EUR fall 60 pips to 1.1210, before some recovery, aided by a Reuters report that predictions for economic growth were likely to be revised up by about 0.1 percentage point and that forecast changes were likely to be small. EUR is back up to around 1.1260.
It highlights how nervous traders are ahead of tonight’s ECB meeting, which will represent a turning point in the Bank’s policy guidance, with growth risks likely to be raised to “balanced” from “negative”. There’s a bit more doubt on whether it removes the easing bias on rates, but we’d argue it’s well overdue anyway. Draghi has a communication battle on his hands tonight and over coming months to contain enthusiasm for EUR and avoid the “taper tantrum” we saw in the US when the Fed backed away from its highly accommodative stance in 2013. We have some conviction in EUR strength through much of the rest of the year, but each ECB meeting from here represents a key risk event that needs to be traded carefully.
GBP has seen an ever-so-slightly modest upward drift through June so far, ahead of the UK general election where polls open tonight. It has nudged up a bit further to 1.2950. A Bloomberg survey, showed that GBP is expected to rise to 1.31 on a large Conservative win, show little change on a small majority win for the Conservatives, plunge to 1.2350 on a hung Parliament or fall to 1.25 on a Labour party win. As I write, yet another opinion poll has flashed across the screen with the Conservatives showing a 10 point lead over Labour. Bloomberg’s “poll of polls” shows an average 8 point lead for the Conservatives.
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