Higher oil prices and a weaker yen

May 12, 2016

FX News Today

European Outlook: Higher oil prices and a weaker yen competed with disappointing earnings results in Japan and the U.S. and left Asian stock markets struggling and swinging between gains and losses. U.S. stock futures are higher but FTSE 100 futures are down ahead of the BoE announcement, which is not expected to bring a change in policy, but will be closely watched for dovish signs in the minutes and especially the quarterly inflation report. Mixed leads then for European bond futures, which closed narrowly mixed yesterday, as a reversal of intra-Eurozone safe haven flows weighed on Bund futures. The European calendar also has final French inflation data and Eurozone production numbers.

BoJ Governor Kuroda: Talked up room for easing substantially, if necessary, in a Boersen-Zeitung interview reported yesterday, warning that the BoJ has “certainly not” run out of ammunition. He suggested that a little patience may be required, but the positive inflation trend is absolutely intact. “The quantitative easing, the qualitative easing, the negative interest rate — these are the three dimensions where we can act,” he said. USDJPY has rallied from an overnight low of 108.28 and is currently trading at 108.92, in an attempt to retake 109.00.

Canada’s GDP Outlook Cut Due to Halt in Oil Production: Canada’s Q2 growth outlook has been sharply reduced due to the Fort McMurray wildfire that stopped oil production in the area. We have cut our projection for real Q2 GDP to flat (0.0%) from 1.5%. But we have boosted our Q3 GDP estimate to 2.4% from 1.8% amid the projected return in oil production and rebuilding in the area. Growth for 2016 has been cut to 1.6% from 1.7%, putting growth below the BoC’s 1.7% estimate. But given that the economic impact of the fire is temporary, the events should not sway Bank of Canada policy.

Main Macro Events Today

UK BOE Announcements:  A no-change stance by unanimous vote is all but certain as the Old Lady has said that it will refrain from changing policy pending the outcome of the Jun-23 referendum on EU membership. Given the evident deceleration in growth momentum in the UK economy, the minutes are likely to show an uptick in dovish language. However, the focus will be on the updated set of forecasts in the quarterly inflation report although will polls still suggesting a very tight decision any forecasts ahead of the referendum will be subject to high uncertainty and greater error margins.

US Import/Export Prices: April trade price data is out later today and we expect to see some increase with a 0.7% (median 0.6%) import price figure and a 0.2% increase for export prices. This follows respective March figures which had import prices up 0.2% and export prices unchanged. The plunge in oil prices that resumed last fall had helped to keep the headline figures negative but with oil prices rebounding we expect to see a subsequent recovery in the trade price indexes.

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