NEWS / Foreign Exchange

GBP breaks 2.0000 for a 15 year high

NZD takes breather ahead of CPI

The NZD traded a tight range yesterday just under 0.7400 with a slight bias to the downside as the market took a breather ahead of the key CPI data due out this morning. Overall the day was fairly quiet with the only thing of note being Finance Minister Cullen's warnings on NZD strength (persistently high, a "stern challenge" for exporters). However this had very little impact on a market well conditioned to his rhetoric. Overnight the NZD broke out of its shackles to post a fresh two year high of 0.7450 thanks to a weaker USD and decent demand from real money and Swiss bank purchases.

AUD well supported above 0.8300

The AUD continues to hold above the 0.8310/0.8290 support level trading in a tight 13 point range throughout the day in relatively quiet conditions. Having opened around 0.8320 the currency pair initially drifted lower but demand at these levels pushed it toward 0.8325 where it spent the rest of the day. Overnight the AUD jumped to a fresh high of 0.8386 as the USD weakened. With little data on the horizon and positive factors supporting the current rally there is little to suggest a sustained correction is in store for the pair. It opens this morning around 0.8366.

GBP breaks 2.0000 for a 15 year high

The majors traded tight ranges during yesterday??™s local session ahead of important US data releases last night. USD/JPY found itself capped at 119.82 with plenty of sellers seen around this level during our day. Late afternoon trading saw the pair retreat to support around 119.10. The offshore session provided excitement with GBP/USD breaking through 2.0000 to post a 15 year high of 2.0075. This move came on the back of a surprisingly strong UK CPI result and the market is now expecting an interest rate hike in May. EUR/USD also surged higher overnight on the back of strong German data and broad USD weakness. The euro peaked at 1.3598 ahead of large option barriers at 1.3600.

Japanese consumer confidence fell slightly in March. The fall was basically in line with expectations. Rising petrol prices and negative press coverage of aspects of the economy more than offset the on-going gains in job security.

US CPI up 0.6% in Mar, but core rate barely 0.1%. The CPI headline was boosted by a 5.9% jump in energy (mainly gasoline). The core rate was constrained to 0.06% by a fall in clothing prices and a way below trend 0.1% rise in medical care costs. The softer core rate was probably temporary, and it still left in place an acceleration in underlying inflationary pressure in Q1 (2.3% vs 1.6% in Q4).

US industrial production fell 0.2% in March, due to a slump in natural gas and electricity output as the weather turned mild. Manufacturing posted a decent 0.7% gain, although that followed a downwardly revised Feb (from 0.4% to 0.1%). Overall, this report suggests that the US factory sector is still growing, albeit modestly.

US housing starts and permits both up 0.8% in Mar. Starts managed to post a further modest gain on top of the Feb surge (revised down a little, from 9.0% to 7.6%). There was a milder weather effect in play, with midwest starts surging 45% but starts easing in other regions. Permits also rose modestly, and their annualised level of 1544k remains higher than that of starts at 1518k. For both starts and permits, the single family dwelling data were stronger, up 2.0% and 1.4% respectively. All this suggests that new homebuilding might be finding a base.

Canadian manufacturing shipments fell 0.2% in Feb, failing to bounce at all after falling nearly 2% in Jan. This weakness is likely due to the railroad strike coming straight after plant shutdowns in the auto and energy sectors earlier this year. March data should be stronger.

German ZEW up from 5.8 to 16.5 in Apr. German investor expectations regarding their economy pushed sharply higher in April, and the less closely watched current measure hit a new all time high.

UK CPI hits 3.1% yr in Mar, its highest since the BoE assumed full responsibility for monetary policy in 1997. Because inflation is now more than 1 ppt above the 2% target, the BoE Governor was compelled - for the first time - to write an explanatory letter to the Chancellor (under the rules set up 10 years ago). A May rate rise is now likely.