US Dollar Up: Ms USA (AKA US Dollar) made some impressive up-moves against her dancing partners yesterday, and has now slowed down right before New York market open. The US Dollar up move was as a result of a number of factors; fast rising European stock markets saw a weaker euro, which in turn fueled dollar strength, this then moved onto oil markets which saw a 3% fall in crude prices ahead of key futures contracts that expired yesterday. This fall added more energy to Ms. USA’s jump on the forex dance floor.
The fall in oil was the fifth straight day of losses, as investors believe that between Saudi and the USA, there will be a serious case of over-supply. We believe that oil prices will head back down to their 2015 lows which, if it does happen, will put further upward pressure on the US dollar and downward pressure on global inflation.
Yesterday the UK saw its first negative inflation reading since 1960. Data showed that prices fell by 0.1% between March and April, which according to George Osborne is good news for families and isn’t a sign of deflation. There are concerns, particularly with the fragility of the oil price, that negative inflation data could become entrenched and over time would prove an economic negative for the country.
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Yesterday the FTSE100 was left well behind in the European stock market race. The FTSE notched up gains of just 0.4%, as most other European indexes rallied by more than 2%. The driver of the move was ECB member Coeure, who said the ECB would ramp up their QE purchases this month and next, to overcome expected liquidity shortfalls in July and August. This was music to the ears of traders, who have had concerns that the ECB might taper their bond purchases well ahead of the scheduled conclusion in September 2016.
Overnight one of China’s main banks has said that the central bank needs to ease policy even further if their intention is to make policies felt in the real economy. ICBC say that banks are still hoarding cash and that both capital reserve requirements and interest rates have room to be cut much further.
Today we see Bank of England (BoE) minutes, which given the election uncertainty when they had the meeting we would expect to be slightly dovish. We don’t think the market will take too much notice of these if they are dovish though, as since the meeting we’ve had the inflation report and a ‘strong’ election outcome.