Forex today was friendly to the euro, and I many respects, the dollar bulls were let off after a cautionary set of FOMC minutes whereby the minutes provided a more in-depth acknowledgement of downside risks to the US outlook emanating from trade policy. However, traders figured, in the absence of information on the expected path of policy, that the Fed was still on track to have raised rates 4 times by the end of 2018 and three more by the end of 2019.
Subsequently, US 10yr treasury yields ranged between 2.82% and 2.86%, while 2yr yields climbed to 2.55% and the Fed fund futures yields continued to price 1 ½ more hikes in 2018. DY was in a range of between 94.1770-94.5900, climbing towards the highs post the FOMC minutes but settling mid ranged by the NY close.
As for the euro, strong German factory orders data gave the bulls a boost to 1.1720 the high from 1.1649 late Asin handover lows. The pair asl was supported by Hawkish ECB rhetoric but the bulls lost grip of the 61.8 Fib of 1.1853-1.1508 whereby DE-US spreads nearing the wider end of the scale took effect while the greenback took back control. As for GBP/USD, BoE governor Carney helped the pair climb to 1.3274 when he gave a speech arguing that Q1 weakness was transitory, therefore increasing the potential “to set monetary policy consistent with returning inflation sustainably to target”. A BoE rate hike at for August’s meeting is now considered increasingly likely more than 80% priced in. The BOEWATCH still sees 62% odds for BoE hike although the pair dropped as “unworkable” Brexit rhetoric took a hold. GBP/USD fell to as low as 1.3204 on a Bloomberg story citing German government sources which stated that the Merkel government viewed UK PM Theresa May’s Brexit customs plan as unworkable. The UK PM has said she hopes her cabinet will be able to “discuss and decide on a substantive way forward” on Brexit at their crucial Friday awayday. As for the cross, EUR/GBP ended the NY session up by +0.32% to 0.8838 within an NY range of between 0.8856-0.8811, with bulls still fulled by the prior comments from ECB sources whereby Bloomberg reported their concerns that the markets are underestimating the timings of a rate hike in 2019.
For USD/JPY, bulls were in control making a high of 110.71, climbing from 110.51 and choppy in a sideways range while traders weigh up the risks associated with tariffs kicking in tonight and nonfarm payrolls on the cards in the US session. As for the high-betas, tightening offshore USD funding liquidity scares off the buyers of carry once again and could turn to commodity-FX on the ricochet. The antipodeans, are, however, looking robust and quite resilient in the face of all of this. The Kiwi continued on its northerly correction to the 0.68 handle and AUD/USDtwisted and turned in NY, supported by the hourly 100-SMA on a correction from the temporary yet shortlived time spent on the 0.74 handle where an early high of 0.7408 was hit. Copper is not doing the bulls any favours on the neckline break. All in all, the Aussie was extending a sideways range between 0.7360 and said highs.
Key notes from US session:
- US: Private sector employment increased by 177K jobs in June vs. 190K expected – ADP
- Nonfarm Payroll preview: tariffs could overshadow employment data
- Wall Street posts strong gains led by technology
- June FOMC minutes: steady hikes, dovish risks – TDS
Key events ahead:
Analysts at Westpac offered their outlook for today’s key events ahead as follows:
“Australia’s data calendar goes quiet until Tuesday when we see June NAB business confidence.
Japan releases data on household spending and wages, so we will see if Japan’s 2.2% unemployment rate is producing any pickup in labour cash earnings from April’s 0.6%yr.
The US employment report will be watched closely as ever, though with the Fed probably focused more on average earnings rather than non-farm payrolls. Consensus on the latter is for a 195k gain in June, after a swift 223k in May. The unemployment rate is expected to hold at 3.8%. A 0.3%mth rise in average hourly earnings would match the May gain and would nudge the annual pace of wages growth to 2.8%. This would match the Sep 2017 cycle high, given that the Jan 2018 headline of 2.9% was revised down.
The US will today impose 25% tariffs on $34bn of goods imports from China, with another $16bn of goods to follow, as punishment for what the US Trade Representative deems “China’s unfair trade practices related to the forced transfer of U.S. technology and intellectual property”. China of course has pledged swift retaliation once the US tariffs are in place, with a focus on US agricultural exports such as soybeans and pork.
Canada June employment is due at the same time as US payrolls, to maximize the risk to USD/CAD. The median forecast on Bloomberg is +20k after May’s shock -8k contraction, while the unemployment rate is tipped to remain at 5.8%. This is an important release ahead of the Bank of Canada rate decision next week, where a 25bp hike to 1.5% is 85% priced in.
Both the US and Canada also release May trade data, sure to be overlooked given the jobs data.”
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