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  • Forex today continued to recover from the risk-off trade sentiment environment that had been building up over these recent week’s.
  • A mixed dollar and a heavy setting for EM-FX and the proxies through Commodity FX, notably in the Aussie and Canadian dollar.  

Treasury Secretary Mnuchin indicated over the weekend that the proposed $150bn US tariffs on Chinese imports would be postponed while trade negotiations continue. Today, in a television interview on CNBC, Mnuchin said that meaningful progress was made in the latest China trade talks. Separately, Mnuchin also said  that President Trump would be willing to accept a “skinny” NAFTA 2.0, i.e., an agreement that did not require Congressional approval if the current negotiations do not go as planned.

With such positive headlines crossing the wires, commodity currencies led the way.   The US dollar traded mixed between 93.5120-94.0580 while the US 10’s traded in the low end of the 3.05-3.08% range overnight. The 2’s were perkier, rising with risk sentiment from 2.55% to 2.57%. The dollar was buoyed by sentiment for continued Fed hikes while the Fed fund futures yields continued to predict a rate hike in June as a 100% certain and plus at least one other by year end. However, from today’s Fed chatter, there seems that there is no rush to raise interest rates and some Federal Reserves officials, well, at least in the case of Fed’s Harker, favour pausing once the Fed reaches a neutral position.

As for other currencies, starting with the euro, Italian politics have been a drag and could well continue to anchor recovery attempts from out of the doldrums of the 1.17 handle and lowest levels since November 2017. However, as the session moved into the early Asia session, the 100-hr SMA was pierced as a last defence for the 1.18 handle, reversing the five-month low at 1.1717 as the dollar loses steam.  

It could well be an uphill battle for the bulls from here though, with the ratification of Italy’s populist/extremist coalition  all but done and fears that investors will cast their minds back to the political strife the eurozone project has lived through over the years; there are already signs that nerves are spilling over to Portugal whose benchmark 10 year bond yield jumped 12bp on the coattails of Italy’s 10-year Italian bond yield. ( Italy’s 10-year Italian bond yield also jumped by some margin, 16bp to 2.39%; a week ago it was just 1.93%.

Sterling was trading on the defence in European trade and switch offensive in the NY session as the dollar buckled at the highs of 94.05 in late London. The pound had otherwise been hurt by fears around a UK snap election, sparked by a Sunday Times article – (note that the bookies are quoting odds between 2/1 for a UK election before year-end). Cable, however, bottomed at 1.3390 and bulls made their intentions from the off in N Y, rallying to 1.3438 the session high before moving into a chop between there and 1.3404 – closing at 1.3430.

The cross rallied to half a penny above recent lows as investors pared back the long speculative positions in the pound, playing catch up with the recent shift in sentiment for the BoE and economic performances. A high of 0.8784 was made from a European low of 0.8738, closing at 0.8780.

USD/JPY rose from the 110.82 pre-Asian resistance on the trade relief headlines and toppled defence through the lower quarter of the 11 handle, capped ahead of sighted barrier option level at 111.50, making a high of 111.39 in European trade (the 100% fibo). However, the bid was faded back to below the 111 handle in NY and the pair made a session low of 110.95.

As for the Aussie, both a shift in trade sentiment and M&A news were supportive while commodities perked up on a softer dollar in the US session. Both oil and copper bounced although iron ore took a step back. AUD/USD rallied from 0.7502 and made a high of 0.7587. The Kiwi, on the other hand, was still bleeding in early European trade from retail sale’s volumes climbing at the slowest pace in five years for the first quarter.  The pair picked up from a low of 0.6883 and rallied to 0.6930, taking a break there before making a session high in NY at 0.6950.

Key notes from US session:

Funda-FX wrap: trade lighter on holiday closures in Europe, global trade front main theme

Ket events ahead:

Analysts at Westpac offered their outlook for the key events ahead today: “Australia’s calendar is quiet again, ahead of  tomorrow’s  Q1 construction data and speech by RBA governor Lowe. Asian data releases are second tier. Bank of England officials Carney, Ramsden, Saunders and Vlieghe appear before the UK Parliament’s Treasury Committee. In the US, we will see the Richmond Fed’s May business survey, expected to rebound to +8 after April’s strange slide to -3, which followed several months of strong readings.”