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  •  Risk-on following an impressive rally in China.
  • AUD was strongest in the G10 after a sharp rise in the Chinese yuan.

Forex today was risk-on with the Chinese performing well, setting the foundations for positive markets; (Shanghai Composite SHCOMP rallied by 2.5%). There was also attention paid to the Brexit angst and the pound was trading around a series of resignations in PM May’s cabinet, while otherwise, the calendar was light and trade angst subdued still, (allowing the market to focus on the Fed and central bank divergences), ahead of NATO and US CPI this week.  

The dollar was mixed, trading between 93.7130-94.2060, sliding in European trade, picking up a bid in NY before settling slightly lower than the highs and a few pips above 94 the figure.  The benchmark US 10yr treasury yield climbed from 2.84% to 2.86% while  2yr yields rose from 2.55% to 2.57%. The Fed fund futures yields continued to price 1 ½ more hikes in 2018.  

Currency action

GBP/USD stood out on the board today where hard sell-offs took the pair down to 1.3189 from 1.3350 Asian highs. A ‘no-confidence’ vote could be on the cards for PM May after Boris Johnson stepped down from his high profile position as foreign secretary.  The next 48 hours could be vital in determining whether there might be a leadership challenge – and a positive outcome for sterling would be a reshuffle of ministers that will back May’s plan and soft Brexit negotiation strategy. The pound recovered back to 1.3250 for the close in NY on such a notion, ending the day down by a modest -0.2%

As for the euro, its fresh shot term high, (above 76.4 FIb of 1.1853-1.1508 & 55-D SMA), made on the back of mildly positive European data and risk-on sentiment following China’s impressive session, the price fell on dollar strength and ended pretty much flat on the day around 1.1750 between a range of 1.1790 and 1.1732. A long upper wick on the daily candle and doji on the daily sticks have formed, pointing to a period of consolidation with a bearish bias. The cross was also taken for a Brexit ride between 0.8813 and 0.8901, ending at 0.8862, with an upside bias playing out where the market’s sentiment for a BoE hike dropped to 58% from 67% after Johnson’s resignation.   In a  sell-the-tariff-news profit-taking scenario, USD/JPY climbed from 110.40 to 110.90 with the yen sold off on a strong performance in global equity prices and firming US treasury yields. However, corporate export offers are sighted around 111 the figure, containing the bulls appetite for further gains at this stage. Looking ahead, NATO is a risk factor for markets, depending on what Trump will come out with. As for the high beats, China was a positive for the Aussie and Kiwi. In fact, AUD was strongest in the G10 after a sharp rise in the Chinese yuan (CNH was best in Asia, up 0.6%). However, copper’s recovery was hardly impressive and AUD/USD started to consolidate the London highs of 0.7481 before sliding down to 0.7455 the NY low.  

Key events in US:

Wall Street closes substantially higher as earnings season looms

Key events ahead:

Analysts at Westpac noted the day ahead’s key events as follows: “At  11:30am  Syd/9:30am Sing/HK we see Australia July NAB business confidence data. Last week the RBA Board noted that, “(b)usiness conditions are positive”, supporting its optimism over non-mining investment. The May business conditions index was indeed elevated, a net balance of +15 versus the 20 year average of +6. This index normally correlates more closely with GDP than the confidence index, which printed at +6, matching the 20 year average.

China releases June data on consumer and producer prices at  11:30am  Syd/9:30am local. There is limited market interest in these as inflation doesn’t seem to be a pressing factor for the central bank right now. Consensus on CPI is 1.9%yr, while the acceleration of oil and coal prices in recent months should keep PPI considerably high – consensus is 4.5%yr.In London trade we see the July survey of German investor sentiment from ZEW, which occasionally has a small impact on the euro. The current conditions index is softening from very strong levels while the expectations index has already rolled over to lows since 2012. UK May industrial production data is worth watching with a Bank of England August rate hike viewed as likely (70% priced in) rather than a done deal. Consensus is 0.5%mth, 1.9%yr. The North American data calendar is third tier – US May data on job openings and turnover plus Canadian housing data.”