Talking Points • Japanese Yen: European equity liquidation drops it below 117.00 • Euro: Loses 142.00 as risk aversion returns ZEW better than expectations • Pound: Core CPI weakest since March 2006 • USD: TICs on tap
The surprisingly negative earnings news from Swedish telecommunications giant Ericsson, pushed European equity markets lower and created a wave of risk aversion selling in the currency markets helping to push yen higher and high yielders lower as carry trades were quickly unwound. Ericsson stock dropped 25% in the aftermath of the announcement dragging many of the European bourses lower. The news sent more jitters through already nervous capital markets which saw the DJIA yesterday close more than 100 points down below the key 14,000 level. The unwind of the carry trade was most prominent amongst the high yielding commodity dollars such as the AUD/USD and the NZD/USD which at one point lost nearly 200 points each from yesterday’s close. With the 20th anniversary of the 1987 stock market looming in the background, capital markets remain on the edge, although the selling appears to be driven more by psychological factors rather than any egregiously negative economic reports from the G-10 universe. In fact, on the economic front, the news out of the Eurozone was mildly positive as the ZEW survey printed at -19 versus -25 originally projected. The steady performance of German manufacturing sector and 10% rise in the DAX over the past two months have given EZ investors reason for optimism despite the export disadvantage of record high exchange rates. If European economy can decouple from the slowdown in the US, the euro should continue to benefit from further rate hike expectations. Meanwhile in UK the pound was hurt by the news that core CPI printed at 1.5% vs. 1.8% forecast. The reading was the lowest since March of 2006 and puts to rest any worries about escalating price pressures that the BoE may have. Tomorrow brings release of the MPC minutes from the prior BoE meeting and traders will want to see if the members were already predisposed to a rate cut by carefully looking at the vote count. Certainly, tonight’s tepid CPI data gives the doves on the MPC plenty of ammunition to argue that a rate cut would not be inflationary at this time, although given the relatively healthy state of recent UK economic data, we doubt the central bank will be inclined to lower rates this year. Rate speculation notwithstanding, for the rest of the day, currencies look to trade off risk aversion flows. In the now familiar “bad-news-is-good-news-for-the dollar” dynamic the greenback along with the yen should benefit from further unwind of the carry, should equities continue to tumble during the US session.