The CPI reading yesterday saw the swaps market go from pricing in a few basis points of cuts over the next 12 months to pricing in around 6 basis points of hikes over the next 12 months. AUD/USD fed off that momentum in overnight trade and managed to rally to a high of 0.888. The first round of stops were in the 0.885 region which is where December lows were and it seems the pair could be facing another round closer to 0.89. As far as interest rates go, I don’t think this changes much.
While the RBA will probably have to revise its inflation forecasts at the February meeting, I still think there is room for a cut particularly if the AUD remains strong. The economy continues to shed jobs and at some stage this will weigh on sentiment and prices. On the local calendar today we have MI inflation expectations at 11am AEDT. On the China front we have the HSBC flash manufacturing PMI due out at 12.45pm AEDT. Consensus is for a 50.6 print. A strong reading here could really help the pair take out the stops in the 0.89 region.
There is an interesting situation unfolding in the UK at the moment which has put the pound firmly in focus. Cable surged through 1.65 after the unemployment rate came in at a much better than expected 7.1% (as opposed to 7.3% expected). In the past the BoE has said a drop to 7% in unemployment would be the trigger for a rate hike. As a result, investors are getting more hawkish about the situation.
In the next BoE meeting, unless the MPC reinforces its commitment to easy monetary policy even in the event that unemployment drops to 7%, then we can expect the pound to remain elevated. Later today we have MPC member Fisher speaking and he might shed some light on the unemployment threshold and what it means for policy. Cable currently trading at 1.658 and fast approaching the January 2nd high of 1.66. A break of this will see it trade at its highest level since May 2011.
The single currency has been quite muted this week against the greenback. There are a raft of releases later today with flash and manufacturing PMIs being the dominant theme. The German manufacturing PMI reading will be of particular interest and any further signs of strength could see EUR/USD push higher.
NCM’s 2Q output will be in focus but most of the detail was pre-released on January 15. The miner didn’t provide commentary on the January 15 release but the production figures were pretty good. Focus will be in cost and debt commentary today. From a price action perspective, we’ve seen NCM gently drift higher after bouncing off $7.50. It is now hanging around $10 and there is some resistance at that level. Today’s commentary could be the trigger for a break through this level in which case a move to $12.50 could be on the cards. Alternatively, this resistance could see NCM sold back down to $7.50.