Commodity FX Quietly Climbing

While market grapples with the direction of the US economy and what the ECB plans to do next, the commodity FX bloc is grinding higher. NZD and CAD were the best performers on Thursday while the euro lagged. Traders now brace for a big day of data in Japan.  

Traders were focused on the inflation since of the PCE report but it was consumer spending that stole the spotlight. Core inflation rose 1.5% y/y, as expected but spending was soft at +0.2% vs the +0.4% consensus. USD/JPY fell 30 pips to below the 200-dma to 101.49 on the report but later recovered.  

Barclays dramatically cut its Q2 GDP forecast to 2.9% from 4.0% after the report but like yesterday's GDP report, the driver of the consumer spending miss might have been healthcare spending. The PCE data doesn't itemize but the miss was in services spending which includes healthcare.

The Fed remains optimistic and Bullard pulled a Carney-like move and said markets don't appreciate how close the Fed is to its goals. That caused a minor round of risk aversion in stocks but very little reaction in USD or Treasuries.

The bigger headline move came on an MNI story citing ECB sources saying further interest rate cuts are possible. The kneejerk was lower in EUR/USD down to 1.3576 from 1.3605 but the text of the story was a bit more revealing. It said the ECB will wait 6-9 to assess before taking any action and that 10 bps rate cuts could come instead of QE. A closer read helped EUR/USD to rebound to 1.3617.

With traders watching those news stories it was the loonie and kiwi quietly stealing the show. We've outlined the technical improvements in CAD and now NZD/USD has crossed above the 2014 highs to the best levels since 2011. Be wary of a near-term pullback from overbought conditions but it's tough to envision any real pain ahead.

Looking ahead, there is a major data slate due for Japan starting at 2330 GMT with the employment and CPI reports for May. Look for CPI ex-food and energy to rise 3.4% but also keep an eye on adjustments due to the consumption tax hike. Twenty minutes later it's the retail sales report  and the consensus is for a 2.9% monthly rise in a rebound after the 13.6% drop in April when the tax first hit.

Signs of a slowing economy or inflation could rekindle dormant chatter about further BOJ moves and boost yen crosses.