Many Developments, Limited Price Action

The news stream has been quite active, but the price action in foreign exchange has been muted. The euro has largely been confined to a 20 tick range on either side of $1.3160. Sterling is a bit firmer, in the upper end of yesterday's range, with the $1.56 cap in place. Perhaps the market has been kept in check ahead of the BOE outcome. However, the recent string of better data has kept expectations high that there will be not change of policy today. 

The dollar remains confined to yesterday's narrow range against the yen. Important support remains in tact near JPY98.50. Our bias is to expect both $1.56 area in sterling and the JPY98.50 area to hold today.

This week's action continues to be dominated by the Antipodeans. Strong employment data from both Australia and New Zealand has seen both of their respective dollars recover smartly. Australia reported 50.1k job growth, some more times more than the consensus expected, and mostly (34.5k) full-time position. The unemployment rate slipped to 5.5%. 

The Australian dollar rose nearly a cent from session lows as the market quickly reassessed the odds of a follow up rate cut in June that some observers had forecast. Aussie gains ran out of steam in front of $1.0260, the 50% retracement of the recent leg down that began at the end of last week near $1.0325. A 3-day base has been built now near $1.0155.

The New Zealand dollar recovered fully from yesterday's slide sparked by the central bank's admission that it had intervened. Better than expected employment data lifted the Kiwi. Employment rose 1.7% in Q1, roughly twice the Bloomberg consensus and the first increase since Q1 12. This was sufficient to lift the year-over-year rate to 0.3% from -1.4%. Kiwi's bounce ran out of steam near $0.8480, a retracement objective.

China reported April inflation in line with expectations. CPI rose 2.4%. The consensus was for a 2.3% rise after March's 2.1% pace. It is all in food prices, which rose 4.0% from 2.7%, while non-food price increases slowed to 1.6% from 1.8%. Chinese officials are continuing to try to curb hot money flows, but the yuan continues to move higher, moving to the top of its permitted band (which fuels talk that the band may be widened soon).

South Korea surprised with a 25 bp rate cut. It weighed on the won, against which the dollar gained almost 0.5%. It helped the Kospi rally and its 1.2% gain was the best in the region and among the best globally today, as the MSCI Asia-Pacific Index snapped a 4-day advance. Thailand's central bank seemed to confirm the likelihood that a rate cut may soon be delivered and this underpinned Thai shares.

In Europe, where Ascension Day is limiting participation, equities are following Asia lower rather than the US higher. The Dow Jones Stoxx 600 is off about 0.25% near midday in London. Utilities, healthcare and telecoms are the weakest sectors, while industrials and basic materials are advancing. Both the UK and Spain reported better than expected industrial production figures.

Spain reported the on a work-day adjusted basis industrial output fell 0.6% in March (year-over-year basis) from a revised 6.9% contraction (was -6.5%) in February. This is the smallest decline since Aug 2011. Like the German IP data earlier in the week, it warns that the sentiment surveys may be somewhat exaggerating the economic pessimism, though of course the high levels of unemployment and declining home prices in Spain make it understandable.

The UK reported a 0.7% increase in March industrial production, well above the 0.2% forecast and builds on February's 0.9% increase. Manufacturing led the way with a 1.1% increase (0.3% expected). ONS quickly noted that it would not alter its GDP estimate, the first revision of which is due May 23.

Fitch's upgrade of Mexico's credit rating yesterday to BBB+, now on par with Moody's managed to finally push the greenback through the MXN12.00 floor. This area should now act as resistance, if the breakout is to be confirmed. Even though this is a catch-up move by Fitch, to many investors it signals the move deeper into investment grade for Mexico. 

The government's reform agenda, low unit labor costs and relative high yields are attracting a wide range of investors and speculators. Last week Congress passed a reform bill that is designed to liberalize telecoms and broadcasting. The government just presented a wide-ranging bank reform package.