Foreign Exchange News
28 February 2014

Eurozone Inflation Back In Focus

EUR/USD             1.3709

GBP/USD             1.6724

GBP/EUR             1.2197 (0.8197)

EUR/CHF             1.2165

GBP/CHF             1.4838

GBP/AUD             1.8651

Yesterday saw Janet Yellen’s first appearance in front of the Senate banking committee. The unseasonably cold weather in the US seems to have been a major player in the recent string of weak economic data. Yellen acknowledged that there was a need to “get a firmer handle on exactly how much of that set of soft data can be explained by weather and what portion, if any, is due to softer outlook.” She also reiterated that the central bank intends to reduce asset purchases at a “measured” pace, but if there is a change in the outlook then “we would be open to reconsidering”.

 

The Fed chair also addressed the central banks forward guidance and their thoughts on the threshold for an increase in interest rates. The current unemployment rate lies just .1% above their previous 6.5% threshold and while she didn’t give any clear indication a revised figure review she did add one “important factor”. This factor was of course the fact that inflation was still running below the Fed’s 2% target and until this figure also improves the current low interest rate environment will remain. She also acknowledged that she may also use qualitative figures when assessing the employment situation as a forward guidance measure, which appears to be an acknowledgement that the headline unemployment rate is not always the best indicator.

 

Earlier in the day, Germany’s preliminary February inflation data was lower than expected (0.5% versus .06%), adding support to our view for a fall in euro area inflation, despite the upward revision to the January figure earlier this week. January euro area unemployment data is also on te morning calendar.

 

Euro area preliminary inflation data for February will be key focus this morning. Given the strength of the euro, subdued commodity prices and a substantial output gap. Many expect CPI to ease to 0.6% in February from 0.8% in January. Another weak inflation reading would heighten speculation of a possible ECB policy response at next week’s council meeting.

 

Looking at how Asian markets responded to Yellens’ comments last night, sees EM currencies taking another hit with the likes of the typical safe haven currencies such as the greenback and Yen being the main beneficiaries. For example, according to a Bloomberg report yesterday, withdrawals from US based funds investing in EM equities and bonds totalled $11.3bn this year, already exceeding last year’s figure of $8.8bn. So should the Fed stick to its expected taper path, this figure will continue to grow. The Aussie Dollar has also been impacted with the currency heading for a second week of declines as the prospect of continued reduction in US monetary stimulus and weaker than expected local data reduced demand for the currency.

 

In an interesting and ever growing development, the China’s yuan slid the most since 2007 on speculation the government will broaden the currency’s trading band. In Clear Treasury we have been highlighting the growing importance of the Chinese yuan as a currency for global trade, so any volatility will now have a more deeply impact on FX markets. The People’s Bank of China is expected to double the yuan’s trading band by the end of June according to a recent poll of analysts, as policy makers there look to continue to loosen exchange-rate controls and promote greater usage of the currency in global trade and finance. Clear Treasury will shortly be releasing a guidance note on the ‘Rise of the Chinese Yuan’ for international trade.

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