- The declines in the greenback followed Fed commentary.
- UK May manufacturing PMI and The May ISM manufacturing index.
Forex today saw another slide in U.S. yields and a deeper low in the dollar following continue concerns over global growth and trade. The DXY dropped to 97.11 while U.S. yields fell from 2.13% to 2.06% in the 10 year which was another lowest since Sep 2017 print. Significantly, it is clear that the market is expecting a rate cut from the Fed in H2 and we can see that due to the inversion in short to longer-term yields. The 2yr yields fell from 1.90% to 1.81% – for a fresh a 17month low.
The declines in the greenback followed Fed commentary, with risks associated with trade and growth, as well as inflation, are setting the course for lower Fed rates. A dovish St Louis Fed president Bullard who is a voter this year said that a rate cut might be ‘warranted’ soon amid mounting risks to the outlook:
“A downward policy rate adjustment may be warranted soon to help re-center inflation and inflation expectations at target and also to provide some insurance in case of a sharper-than-expected slowdown. Richmond Fed president Barkin did not address monetary policy though he did note the US labour market is “red hot”.
As for data overnight, the main focus was on the UK May manufacturing PMI and The May ISM manufacturing index, both of which disappointed. The UK May manufacturing PMI slumped to 49.4 (est. 52.2, prior 53.1) while the May ISM manufacturing index slipped 0.7pts to 52.1 in May, to lowest levels since October 2016.
Currencies …
- EUR/USD climbed from 1.1160 to 1.1260.
- USD/JPY printed another 5-month low, falling from 108.40 to 107.90.
- Ahead of the RBA and retail sales today, the Aussie climbed on dollar weakness, up from 0.6940 to 0.6983.
- NZD/USD also rose from 0.6540 to 0.6604, and was the outperformer on the day.
- GBP/USD popped 40 pips to 1.2670 on dollar weakness.
Key notes from Wall Street:
Wall Street slumps on first day of business for June following worst May since 2010
Key events ahead:
Analysts at Westpac noted the RBA and explained what to expect from the event as follows:
Markets are fully priced for the RBA to cut the cash rate by 25bp to 1.25%, its first change since August 2016 (statement at 2:30pm Syd/12:30pm Sing/HK). The minutes of the May meeting indicated that the Board was ready to cut rates in “the scenario where there was no further improvement in the labour market” and in his key speech the same day, Governor Lowe said a rate cut would be considered in June. Given that RBA forecasts of barely trend growth and below-target inflation include the technical assumption of a 1% cash rate, the main question for markets should be when the next cut will be delivered.
So market reaction should be focused on any hint on timing in the concluding paragraph of the statement. Pricing for the next move has been fluid around Sep and Oct, with the terminal rate around 0.80% in mid-2020. Governor Lowe speaks at the RBA Board dinner at 7:30 pm Syd/5:30pm Sing/HK to provide more detail on their outlook.
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