- Forex today saw a mixed Dollar but U.S. yields fell to the lowest since Sep 2017
- BoC holds rates steady, optimistic on the domestoc economy.
- War drums in the Middle East and Sino/US trade standoff escalates.
- Safe-haven yen performing surprisingly poorly.
The US dollar was mixed, though mostly firmer overnight while U.S. yields took the brunt of the risk off mood following an escalation of trade war angst due to various media reporting on Chinese retaliation measures.
From the get-go, market flows ran away from riskier assets on the noise that China will retaliate by weaponizing so-called rare earth metals. This was accompanied by heightened beats of the ‘war-drums’ due to news that Donald Trump’s national security adviser Bolton was claiming, without offering evidence, to journalists in Abu Dhabi that the alleged sabotage of four oil tankers off the coast of the United Arab Emirates came from naval mines placed “almost certainly by Iran.” Later in the day, causing a pop in WTI prices, Iranian Supreme Leader Khamenei was reported to have said that the nation will use military pressure if needed – according to State TV.
As a result, stocks were grounded and falling for the majority of the day. The Dow Jones Industrial Average dropped 221.36 points, or 0.87%, to close at 25126.41. The S&P 500 fell 19.37 points, or 0.69%, to close at 2783.02. And the Nasdaq Composite lost 60.04 points, or 0.79%, to finish at 7547.31. A flight to safety sent US 10yr treasury yields falling from 2.26% to 2.21% – the lowest since Sep 2017 and taking it further below the 2.38% Fed funds rate which some consider a harbinger of recession – but fully retraced late in the NY session, as noted by analysts at Westpac.
BoC holds and bullish on the domestic economy
Elsewhere, the main news from the U.S. session came with the Bank of Canada that left its policy rate at 1.75%. This was a result fully expected and priced in already by the market, however, Governor Poloz was bullish on the growth outlook.
Analysts at TD Securities explained that,”there was no change to the Bank’s forward guidance, which notes that the current accommodative policy remains appropriate pending the evolution of household spending, energy sector dynamics, and global trade tensions.”
Meanwhile, on their outlook, the analysts are comfortable with their forecast for the BoC to remain on hold for a prolonged period of time:
“We like fading the move lower in front-end rates and positioning for a flatter curve,” for FX, the analysts note,”The loonie continues to respect the boundaries of the key 1.3520 pivot level. Some positive developments on the Canadian story helped to offset some of the rising global uncertainties, generating more noise than signal this morning. Global risk sentiment will dictate the next move.” Elsewhere the BoC understandably noted heightened global risks, so that is something to keep an eye on from here and a deteriorating maco backdrop will likely support an upside bias in Funds.
As for currency action, analysts at Westpac offered a summary as follows:
- USD/CAD was whippy on the release”, (BoC), “but ultimately a little firmer, with oil prices weaker on the day”.
- EUR/USD fell from 1.1170 to 1.1125, GBP/USD -0.2% to 1.2630.
- USD/JPY rose from 109.20 to 109.70, the safe-haven yen performing surprisingly poorly.
- AUD/USD was resilient, falling from 0.6930 to 0.6904 as US equities reached their lows after the statement by Bob Mueller but then rebounding to 0.6915.
- The kiwi underperformed, NZD/USD sliding from 0.6545 to a low of 0.6504.
- AUD/NZD thus rose from 1.0580 to 1.0620/30.
Key notes from Wall Street:
Dow Jones Industrial Average dropped 221.36 points on trade angst
Key events ahead:
For the day ahead, we have official Australian data due at 11:30am Syd/9:30am Sing/HK – Q1 private capital expenditure and Apr building approvals.
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