SCOREBOARD: Australian dollar drag

There were some big moves overnight in commodities and forex, some of which seem related to general US dollar buying, with the index up about 1 per cent. But overall, I can't really see one unifying theory as to why things moved as they did. Various explanations are being thrown about but none seem satisfactory to me. Greek woes weigh on the euro I'm sure, and yes a general strike was called, but strikes are common in Greece and their problems have been around for a while. So why that translates into a 220 pip drop in the euro I don't know, especially when German inflation was stronger than expected last night, rising 0.3 per cent in April to be 2.7 per cent higher annually (ECB target for euro zone is 2 per cent, less ideally). This can't be a calming influence on the ECB.
 
For its part, sterling ended little changed (from 1630) but ranges were wide, with the unit hitting a peak of 1.6517 before settling back down to 1.6353. The BoE's inflation report was a big swing factor here and I can see why the currency would have pushed higher. Get this – the BoE reckon that "there is a good chance that inflation will reach 5 per cent later this year and it is more likely than not to remain above the 2 per cent target through 2012”. So they're not forecasting inflation to come back to target till 2013 and yet rates remain at a record low. This is a ludicrous situation and the bank clearly has no credibility, which is maybe why sterling eventually sold off. It is surreal that there is even a debate about the timing of the bank's hike. 
 
The other big move in forex was the Australian dollar, which was down just under two big figures to 1.0697. But the cause here seems clear enough – commodities were belted again (not so clear), the rout seemingly not done which I find surprising, given the strong Chinese dataflow yesterday. Industrial production surged, retail sales surged, fixed investment surged and inflation rose, but is still well off its peaks. The belting was broad-based though, everything was weaker – crude especially so after a US Energy department report showing crude supplies rising and fuel demand falling. The CME actually had to suspend trading for five minutes. In the end, WTI was down 4.6 per cent to $99.14 and Brent fell 3.5 per cent to $113. Copper then dropped off 3.4 per cent, gold was off $23, silver fell 7 per cent and cotton, sugar, wheat and corn all fell sharply as well. 
 
That done, equities were hit on Wall Street (less so in Europe, with major indices between -0.7 per cent and 0.3 per cent) the S&P finished down 1.1 per cent and yes, basic materials and energy were the key underperformers (down about 3 per cent), although all sectors were weaker. The Dow for its part was off 130 points (12630), the Nasdaq fell 0.9 per cent (2845) and the SPI dropped 0.9 per cent (4740).
 
Finally, treasuries rallied on about average volumes, with the yield on the 2-year falling 3bps to 0.55 per cent, the 5-year falling 6bps to 13.85 per cent and the 10-year falling 4bps to 3.16 per cent. Aussie futures traded on a 5-6 tick range, ending 4 ticks higher – with the 3s at 940.86 and the 10s at 94.59.
 
Bits and pieces otherwise, with the US trade deficit widening to $48.2 billion from $45 billion as exports surged 4.6 per cent and imports surged 4.9 per cent. Global trade is booming, the global economy is booming. Then US mortgage applications rose by 8 per cent in the week to May 6. Finally, we had some Fed speak and the Fed still seems split – Kocherlakota reckons rates could go higher this year, Pianalto is still worried by a weak labour market, Lockhart says the bar for further QE is high, but I think the important point to note is that he isn't ruling it out. I still maintain that the Fed will use any excuse, no matter how flimsy, to print more money. So we need to be on guard for that.
 
For the day ahead, Australian employment data is out at 1130 AEST. I'm looking for a rise of 15,000, not too different from the consensus of 17,000. The unemployment rate is forecast to remain steady at 4.9 per cent. Tonight, watch out for US retail sales, PPI, more Fed speak including from Bernanke. Then in Europe, UK and EC industrial production are due.

Adam Carr is senior economist at ICAP Australia. See Business Spectator's glossary for definitions of technical terms used in SCOREBOARD articles.