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  • Greenback wallows on poor economic data following yesterday’s FOMC minutes below bull’s sweet spot.  

  • Safe havens bid on deteriorating US-China trade deal sentiment, equities drop but bounce towards close.  

Weak U.S. PMIs and housing data hurt the greenback and US yields overnight while renewed concerns about a prolonged trade stand-off between the U.S. China sent risk packing and the yen on a tear, hurting commodities and commodity-FX.

Firstly, the Manufacturing PMI fell  2 points  to 50.6 which was the  lowest level  since 2009 while  US Services PMI fell 2.1pts to 50.9, a three-year low. US new home sales lost  -6.9% in April while US jobless claims offered some solace for the greenback,  coming at  211k last week.  

Bleeding out from yesterday’s FOMC minutes that failed to appease the bulls on lack of a hawkish tilt, the DXY dropped back from 98.37 to a low of 97.81 while the US 10yr treasury yield dropped to the  lowest level since Oct 2017  from 2.38% to 2.29%, ending the day around at 2.32%. In the same vein,  it is worth noting that the odds  of a Fed rate cut by December, implied by Fed fund futures, rose from 100% to 130%.  

As for U.S. Chinese relations and sentiment, investor-herds fled the  tech, industrials and energy stocks expecting a prolonged stalemate between Beijing and Washington.

 

There were sharp losses in the U.S. benchmarks although there as a late session spike that took the indexes off their lowest points of the day.

  • The S&P 500 down 1.2% to end around 2,822.
  •  The tech-heavy Nasdaq Composite dropped 1.6% to end near 7,628.
  • The Dow Jones Industrial Average (DJIA), -1.11% lost 286 points, or 1.1%, to end around 25,490.

“China is prepared to hunker down and support its private enterprises rather than yield to the financial pressures being applied by the US. As both  sides  will only negotiate on their own terms, it could be years before the two powers can find sufficient common ground. Nomura is pricing in a 65% probability of the US imposing tariffs on all Chinese goods before year-end,” analysts at ANZ explained.  

An intensifying US-China trade dispute presents a potential downside risk for commodities and related FX  such as the Aussie which  was heavy in Europe, trading below 0.6865, but somehow managed to recover some ground in the U.S. in the face of weak US data, climbing  back through into the  0.6900 handle.

Currency action

Analysts at Westpac summed up the price action elsewhere:

EUR/USD initially fell from 1.1150 to 1.1107 – a two-year low, but then rose to 1.1187 following the US data and fall in US interest rates.  

USD/JPY fell from 110.40 to 109.46, the safe-haven yen outperforming as usual as US equities and yields tumbled. US and Chinese officials exchanged insults over Huawei and trade in general.

NZD similarly bounced from 0.6482 – a seven-month low – to 0.6525.  

AUD/NZD did capture the risk-off theme, falling from 1.0600 to 1.0570/80.  

CAD underperformed as oil prices slumped.