Talking Points:

Yen Outperforms, Aussie Sinks on Pro-Taper Fed Cues and China PMI
Euro Sold as Soft Inflation Data Fuels Bets on ECB Stimulus Expansion
US Dollar Looks to January’s CPI Report to Power Continued Recovery

The Japanese Yen outperformed in overnight trade as Asian stocks followed Wall Street lower, boosting demand for the safe-haven currency. As we suspected yesterday, the broad-based erosion in risk appetite followed hawkish cues from the Federal Reserve, with a round-up of pro-taper commentary from officials including Atlanta Fed President Dennis Lockhart and San Francisco Fed President John Williams followed by a firm tone in minutes from January’s FOMC meeting.

The Australian Dollar bore the brunt of selling pressure as the generally dour mood was compounded by disappointing Chinese Manufacturing PMI data from HSBC. The report showed factory-sector activity contracted at the fastest pace in seven months. China is Australia’s largest trading partner and slowing performance there bodes ill for demand prospects in the latter country’s pivotal mining sector, eroding investors’ RBA policy expectations.

The Euro likewise traded lower following disappointing German PPI and French CPI data. The former metric showed wholesale prices fell 1.1 percent year-on-year in January, marking the worst reading in at least three years. The latter put the headline inflation rate at 0.7 percent in the Eurozone’s second-largest economy. Economists were penciling in a print at 0.8 percent before the release.

The markets’ response to the subsequent publication of February’s flash Eurozone PMI readings was relatively muted, reflecting the primacy of news-flow guiding ECB policy bets in the minds of investors. Indeed, the narrow mandate guiding the Eurozone monetary authority’s actions means anemic price growth data speaks far more directly to the possibility that Mario Draghi and company will expand stimulus efforts than do broader indicators of economic activity at large.

Looking ahead, the spotlight falls on January’s US CPI print. Expectations suggest the year-on-year inflation rate accelerated to 1.6 percent, the highest in six months. As we discussed in detail earlier in the week, the outcome may bolster bets on QE “tapering” continuity and thereby help support a recovery in the US Dollar. A firm print in the context of increasingly disappointing G10 economic news-flow since late-January may likewise fuel global growth fears and sink risk appetite, weighing on sentiment-geared currencies like the New Zealand Dollar.

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