It was a quiet trading week with most developed market currencies staying range-bound. Other than the geopolitical issues in Eastern Europe, the attention was on the Draghi speech on Thursday in Amsterdam. Draghi reiterated that in order for the ECB to ease, there needs to be a large negative surprise to inflation and that the current picture is not enough to pull the trigger. He talked down the need to respond to tightening in the very short-end, unless transmitted to medium term part of curve. His commentary on FX was more nuanced, because he argued that it has to be seen in context of easing of credit conditions due to returning inflows. In addition, he placed emphasis on the medium-term inflation outlook and expectations rather than the upcoming spot inflation prints.
ECB’s Luc Coene views made the ECB action sound more imminent than Draghi’s headlines and argued the strong euro is a problem for the ECB and April CPI could cause the ECB to act. Vitor Constancio, Vice-President of the ECB also argued that all options are on the table.
On the geopolitical side, reports were out that Russia had ordered new military exercises on its border with Ukraine in response to an operation by Kiev against pro-Russian separatists. Gold moved almost 30$ higher and equities dropped one percent to end up flat on Thursday..
In summary, on the foreign exchange side, Markets closed the week with a weaker dollar against the low yielders. After reaching a low of 1.6794 on Wednesday, the Pound ended the week near the high of 1.6816. Euro on the other side behaved in a more bullish way after Draghi’s speech. After dropping to a low of 1.3785, the currency closed the week near the high of 1.3840.
In the commodity complex, gold continues to be supported by the geopolitical situation in Europe. After moving to a low of $1268, the metal jumped over $30 to close the week around the $1,303 level.
The number of Americans filing new claims for unemployment benefits increased more than expected last week, but the increase does not suggest a shift in labour market conditions as the underlying trend continued to point to strength. Initial claims for unemployment benefits rose 24,000 to 329,000 for the week ended on April 19. Claims for the week ended April 12 were revised to show 1,000 more applications received than previously reported. Analysts expected jobless benefits to rise to 310,000. The late Easter this year and the timing of school spring breaks accounted for the miss this week as the four-week moving average for new claims, rose only 4,750 to 316,750.
The claims report also showed the number of people still receiving benefits after an initial week of aid fell 61,000 to 2.68 million in the week ended on April 12, the lowest level since December 2007.
Sales of new US homes tumbled to their lowest level in eight months in March. The Commerce Department said on Wednesday sales dropped 14.5 percent to an annual rate of 384,000 units, declining for a second consecutive month. February’s sales were revised up to a 449,000-unit pace from the previously reported 440,000-unit rate
Economists had forecast new home sales at a 450,000 unit pace last month. Compared to March last year, sales were down 13.3 percent the largest decline since April 2011. Last month’s decline could still be reflecting some of the impact from the cold weather as sales plunged in the Midwest and the South. They also fell in the West, but rose in the Northeast.
Analysts also noted that the inventory of new homes still remains historically low and could be also one of the reasons why sales are dropping
In a speech given by Stephen Poloz governor of the Bank of Canada, the Bank is more optimistic over the recovery of the country’s exports but if exports do worse than expected, overall inflation will fall again and drift further from the target. Poloz had previously confessed to being puzzled by Canada’s lagging exports and said a recovery of the sector was a prerequisite for full economic comeback. Higher consumer energy prices should push total inflation up in the next few quarters but this will be transitory and therefore “the downside risks to inflation remain important, he said. The bank targets tow percent inflation. The bank’s analysis of 31 non-energy export sectors found that the recent depreciation of the Canadian dollar would help some industries, but that the majority of sectors that had been doing well — and which the bank says should drive the export recovery — are less likely to benefit from the lower currency.
According to German newspapers, The ECB continues to hold out to market pressure for easier policy. Central bankers of all stripes speak quietly of QE being more of a “weapon of last resort”. Draghi, they say, is welcome to put it on display, but few want to see him actually fire it, and this sentiment was solidified via Draghi’s speech talking down risk of short end rates, being nuanced on FX, and placing emphasis on inflation expectations Vs spot.
It seems pretty likely that the ECB will be challenged by further EUR strength, or markedly weaker inflation data, but recent comments seem to be pointing towards a hawkish turn. An interview between ECB Governing Council member Ewald Nowotny and an Austrian newspaper, highlighted that he believes “there’s no urgent need for the ECB to act.” He said for now, there is no sign of deflation expectations, and while Japan example is “a warning for every central banker,” danger of Japanese-style deflation scenario is not an immediate one.
The Ifo Business Climate Index for industry and trade in Germany rose to 111.2 points in April from 110.7 points in March. The overall mood came to the highest level since July 2011, the mood for construction brightened slightly, while the mood for wholesale rose significantly to the similar level as it was in the spring of 2012.
The Peninsula
