ECB Mario Draghi told investors to “get use to the volatility” sending European yields and euro higher. And the volatility continues today. China’s Shanghai Composite is down nearly -4.00% on news that brokerages were tighten trading conditions. Volatility, as traders unwind leveraged products in China, spread to other Asia equity indexes pushing the Nikkei, Hang Seng andS&P/ASX 200 around -1.20% lower. Uncertainty in Asia looks to be ticking into the Europe markets as stock future are point to a lower open. The overall takeaway from yesterday’s ECB rate decision and accompany press conference was the banks remains dovish. The ECB reaffirmed the banks intention to implement the program of asset purchases in full despite recent improvement in inflation outlook. However, rally in bund yields and euro seem to suggest that the markets is discounting Draghi’s comments. Traders were hoping that Draghi to address the recent volatility in fixed income yet he coolly stated that volatility would continue. EUR/USD rally stalled after hitting 1.1285 but EUR/JPY pushed to 140.36. Greek Prime Minister Alexis Tsipras returned from discussion with EU officials in Brussels stating that a deal with creditors was “within sight”. Going on to say that Greece would make a this week’s payment to the IMF. In the US, ADP reporting private payroll increased by 201k for the first time since January. This positive read is consistent with an NFP read of 225k on Friday.
In the forex markets AUD was the big mover. AUD/USD fell sharply from 0.7780 to 0.7779 on data indicating that retail sales and trade balance was weak. In Australia, April retail salesremained flat against exceptions for a 0.3% increase. While trade deficit widened to A$3,888mil against a deficit of A$2,100mil. Imports rose 4.00% as the value of industrial equipment, machinery rose and oil increased. However, worryingly for Australia, and regional export driven economies, evidence that demand weakness is growing. Australian exports fell by 6.00% in April led by weakness in commodity prices and demand. AUD/USD short term bullish correction looks to have faded before the 38.2% fibo retracement level at 0.7813/20 (from May highs to June low). Reverse indicates an renewed interest in retesting 0.7600 support (then 0.7535 April lows). Elsewhere, New Zealand value of all buildings increased 1.0% q/q in 1Q from a decline of 2.1% in 4Q. AUD/NZD reversed sharply after hitting 1.0914 following strong rebound. Direction will depend heavily on June 10th RBNZ policy meeting. Where expectations is heavily skewed towards a rate cut.
South Korea’s GDP growth rate was revised upwards to 2.5% y/y against preliminary estimates of 2.4%. Good news from a nations that is suffering from a regional strong KRW. Finally, Brazil raised interest rates for a sixth straight time as policy makers struggle to get inflations under control. The votes to increase the benchmark rate 50bp to 13.75% was unanimous, with the accompanying statement language mirrored that of prior statements.
Today’s BoE meeting is highly likely to be a non-event by keeping policy unchanged. From the US, Initial claims are expected to come in a 278K after last week’s 282K rise. In Mexico, Banxico is anticipated to remain on hold at 3.00%. We remain bearish on MXN as growth continues to deteriorate and the central banks inflation forecast remains dovish.