Crude oil continues to rally, now at $47; Australian inflation expectations lower, triggers AUD selling; no moves from BoE sees GBP rally

By Jason Wong

With a lack of news, there hasn’t been a lot of change in currency markets. The AUD has underperformed, while the NZD is flat.

Equity markets are generally softer again with weaker technology shares driving the S&P500 lower this morning.

However, a rally during the course of writing this has seen the index nudge into positive territory, following yesterday’s 1% fall.

WTI oil prices touched a six month high above the $47 mark, but are now meeting resistance at that level, despite a more positive outlook in the monthly International Energy Agency report.

The IEA said global oil stocks would experience a drastic reduction in the second half of the year on the back of strong demand and falling supply by some major producers.

The AUD is the weakest major currency, with AUD/USD down 0.6% to 0.7330. Inflation expectations data are usually ignored, but with heightened sensitivity about the inflation outlook at present, a drop in a consumer-focused measure from 3.6% to 3.2% triggered some AUD selling.

With NZD flat just over the 0.68 mark, the NZD/AUD cross has pushed up to around 0.93. An upward bias to the cross has been in place since weak Australian CPI data were released in late April. There is strong technical resistance around the 0.95 mark, while on our projections (updated at the beginning of the week) we don’t see the cross (sustainably) revisiting the sub-0.90 level again this year.

GBP rallied following the unchanged policy decision by the Bank of England. The vote was 9-0 while some in the market expected one or two dissenters to call for a cut. At its high, GBP/USD was up 0.6% to 1.4530, but that gain was fully unwound and the currency now trades flat around 1.4445.

In the inflation report the BoE said that a vote to leave the EU “could lead to a materially lower path for growth and a notably higher path for inflation…sterling is also likely to depreciate further, perhaps sharply.” The MPC estimates that the referendum effects may account for around half of the 9 percent fall in the pound’s trade-weighted rate in the past six months.

JPY is a little softer with USD/JPY up 0.6% to 109.10, after reaching as high as 109.40. A former deputy chief to Kuroda, Takatoshi Ito, was reported as saying that the BoJ could ease in June or July if inflation indicators weaken and stock prices drop.

EUR is on the soft side, not helped by a 0.8% fall in euro-area industrial production, a big miss compared to the expected flat result. EUR/USD is down 0.4% to 1.1380.

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