DB FX Daily: London CPI & the day ahead, short EUR/SEK

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FX Daily: London
CPI & the day ahead, short EUR/SEK
Today's Key Data and Events
USD Core CPI for May, 0.2% mom expected (12:30 GMT)
USD Balance of payments for Q1, -$201bn expected (12:30 GMT)
USD Bernanke speaks, Q&A expected (12:30 GMT)
USD TICS data for April, $71bn expected (net l/t flows) (13:00 GMT)
USD IP for May, 0.2% mom expected (13:15 GMT)
USD U of M consumer confidence for June, 87.8 expected (14:00 GMT)

Upcoming Event Risks
June 20: Riksbank rate decision, BoE minutes
June 27: Norges Bank rate decision
June 28: FOMC rate decision
July 2: Tankan survey for Q2

CPI - is it about to come back in importance?
As the chart below on the left shows, recent core CPI releases in the US have tended to have an ambiguous impact on EUR/USD over the day. Ranges around the release have also tended to come down significantly over recent times as the focus of the market shifted over the course of 2006 from inflation concerns to growth concerns.

However, with the rates market having removed any pricing of a rate cut from the front-end of the Eurodollar strip we suspect that today's CPI might take on heightened importance for markets - if for no other reason than to seek confirmation that Fed tightening this year is unlikely in the current environment. Given the volatility in a range of markets over the past week or so the implications for FX out of these data will most likely stem not from the outright surprise on the CPI, but rather what bond markets conclude about the Fed in light of the CPI. A better-than-expected CPI would likely put a near-term lid on expectations that the Fed may need to tighten, while further bond and equity market weakness would appear likely on the back of a higher inflation print.

Of course the CPI is not the only release tomorrow. Also out in the US are the monthly TICS data, the quarterly BoP, IP, consumer confidence data and a speech from Bernanke (complete with following Q&A). This will be Bernanke's first outing since Treasuries started selling off last week and for that reason should be keenly watched.

We like selling EUR/SEK at current levels
A better-than-expected CPI report and also some soft industrial production data have weighed on SEK over the past week, with EUR/SEK at its highest level since early 2006. At the same time rates markets in Euroland have moved to price the ECB hiking to 4.5% - a move that appears a little overdone to us.

Further, as the chart below on the right shows, the move in EUR/SEK has extended somewhat beyond what the 2-year rate differential would suggest. As a result we favour short positions in EUR/SEK at current levels, especially heading into next week's Riksbank meeting where a 25 basis point rate hike is expected.