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FXstreet.com (Barcelona) - Forex Flash: Inflation provides scope for central bank largesse to continue - Societe Generale

FXstreet.com (Barcelona) - Kit Juckes, Global Head of Currency Strategy at Societe Generale notes that inflation provides scope for central bank largesse to continue.

He begins by noting that with 2yr swap rates edging below 2.8% on Friday, a rate cut in Australia was largely priced in, even if it wasn’t widely expected amongst economists. He adds that that, along with a bounce in copper and some other commodity prices, is why AUD/USD is holding up and it needs to close decisively below 1.02 to make chart-drawers (and me) really happy. He writes, “The RBA was allowed to cut because recent inflation data are low. Away from that, the split between resources/domestic sectors of the economy is not new and growth hasn’t fallen off a cliff. But inflation may even allow further easing.”

Juckes sees that the currency is overvalued and supported only by risk-on (SPX), commodities and rates/yields. As two of the three pillars holding it up come down, it is only a matter of time before a return to the mid-90s is seen. Lack of inflation is evident in the UK BRC shop price index too, which fell to 0.4% y/y in April, its lowest level since 2009. He comments that the BRC measure may come in way below the CPI series, but the trends are similar enough that we might get better CPI news in the months ahead.

He writes, “Receiving 10yr/10yr GBP vs US still appeals to me, and with the MPC likely to do absolute nothing this week, I don’t see much wrong with short EUR/GBP trades, either. In Europe, yesterday’s dovish comments from Mario Draghi kept the peripheral bond mood buoyant. The sharp contrast between yesterday’s Fed loan officers’ survey and the ECB bank lending survey a couple of weeks ago won’t have any market impact, though EUR shorts and Euro receivers against dollar payers appeal for those with any patience. French industrial production data were weak too (-2.5% y/y, with manufacturing -4.9% y/y). German factory orders are the ‘highlight’; of the economic calendar. The US will watch slightly firmer commodities but after yesterday saw the S&P extend higher, a correction would come as no surprise at all.”

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