- Dollar holds on to recent gains fulled by dialled back Fed expectations.
- USD/JPY susceptible to risk-off flows following N.Korea missile launches.
Forex today was subdued and the DXY was unchanged on the day while U.S. stocks retained their bid. However, U.S. yields were pressured as markets prepared themselves for the possibility of a new easing cycle with the high odds of a dovish ECB likely to spur on such sentiment.
The US Dollar hovered between 97.60/70, consolidating the latest advance as markets dialled back the probability of a 50 basis point cur to 26 basis point cut from a vigilant Federal reserve next week. However, the ECB is an immediate focus and the overnight disappointment in PMIs from euroland had the markets in anticipation of prolonged dovish sentiment for time to come. This lead to a fall in European interest rates – with the German 10-year yields dropping from -0.34% to -0.39% which was just shy of a record low. The US 2yr Treasury yields followed, initially falling from 1.83% to 1.80% while 10-year yields fell from 2.08% to 2.04%.
Across the channel, Boris Johnson was sworn in as the new UK Prime Minister, but that didn’t seem to dent the markets too much with respect to a hard Brexit as observers are really not convinced and expect there to be another extension instead which will utility lead a soft Brexit style exit. However, Sterling is likely to skid along the bottom of its ranges all the while UK politics is up in the air, especially with further Cabinet resignations in the pipeline.
As for US PMIs, services data was robust, but Markit’s preliminary US Manufacturing PMI dropped more than expected in July and a touch away from contraction territories; The data fell to 50.0 from 50.6 which was the lowest level in almost about a decade. Buffering the disappointments, New Home Sales lifted by 7% in June.
In recent trade, there has been news that two unidentified projectiles were fired into the East Sea as North Korea gets frustrated by lack of progress in talks with the US. The launch appears to resemble the May 2019 firing of two short-range missiles, which travelled approximately 260 miles and was fired from the Wonson area.
“Our military, in preparation for additional launches, is maintaining (its) readiness posture by monitoring related movements,”
an official in the South Korean Joint Chiefs of Staff office said.
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USD/JPY bulls run into supply and risk appetite dwindles on N.Korea headlines
Currency action
Analysts at Westpac noted the action from overnight:
“EUR ranged sideways between 1.1125 and 1.1155. GBP bounced from 1.2430 to 1.2522 as some uncertainty was removed with the appointment of Boris Johnson as new PM. USD/JPY round-tripped from 108.20 to 108.00 and back. Underperformer AUD extended yesterday’s losses, from 0.6990 to 0.6973, as Westpac changed its RBA forecast from one more cut to two more. NZD bounced slightly from 0.6692 to 0.6720. AUD/NZD fell from 1.0430 to 1.0396.”
Key notes from Wall Street
Wall Street ends mixed, with S&P and NASDAQ scoring record highs
Key events in Asia
RBA’s Governor Lowe will speak on “Inflation Targeting & Economic Welfare”, Sydney 1:05pm at the Anika Foundation lunch with a Q&A.
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