Maybe there’s a better explanation of the correlation between oil prices and inflation expectations (or at least, market pricing of inflation forwards) but the breakdown in the relationships between money supply and inflation, or unemployment and wages, or indeed growth and inflation, leaves financial market participants relying on oil and currency trends to drive inflation expectations. The oil price bounce has run out of steam and at the same time, the bounce in inflation expectations in Europe is also fading. We get final Euro Area CPI data today (exp zero y/y) as well as the ZEW index (exp 62.3 vs 70.2 last). If all this sees Bund yields peak for this move too, maybe the euro bounce is over.
That’s a lot of maybes. Greek nerves are still angling as time runs out for a debt deal, and that saw the Euro fall yesterday, while NOK, PLN and HUF all fell more. Needless to say, the European habit of taking all negotiations to the wire means that failure to agree a deal until the last minute, doesn’t mean they won’t get one and any deal could give the Euro a bit of respite while supporting CEE and Scandinavian currencies. Societe Generale remains long of NOK, SEK and PLN against EUR, CHF and GBP. “The S&P hit a new high yesterday and only the Ruble out-performed the dollar. This breakdown can see higher-beta currencies shrug off a stronger dollar, at least up to a point, but it also may open the way for further USD/JPY gains”, says Societe Generale.Other overnight news saw RBA minutes largely ignored, and a rise in New Zealand inflation expectation support the (beaten-up) NZD.
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