- Traders bracing for higher inflation as ECB looks set to make a key change of policy announcements.
- Geopolitical risks keep a lid on USD/JPY advancing to 110 handle.
- Aussie was the worst performer ahead of key GDP Q1 data, (due at 11:30am Syd/9: 30am Sing/HK/01:30 GMT)
Forex today was mirroring a subdued global market where risk appetite was reduced, where it feels like markets are preparing for higher inflation and ongoing geopolitical uncertainties are keeping the bulls penned in. Italy was under pressure again on the back of Conte’s maiden speech as the nation’s new Prime Minister leading the newly sworn in eurosceptic coalition government. US yields were lower despite firm data. The DXY dropped within a range of 93.7820-94.3160 as the euro rallied on speculation that next week’s ECB meeting could offer guidance as to when the board members expect an end to the bond purchasing programme.
The single unit was feeling the pressure throughout the Europen session but recovered the losses in NY trade and advanced to 1.1719 from the Europen low of 1.1652. Initially, Conte’s strong message during his maiden parliamentary speech underlined the coalitions strong desire for EU changes where he vowed for radical change. This sent the euro lower by 50 pips off the bat. However, the turnaround came after a Bloomberg reported sighted ECB policymakers desire to use the June 14 meeting as a platform to discuss the timings for when the Central Bank could end its bond purchase program.
GBP/USD was up in European trade on the back of yet further signs that the economic slow down was related to the weather, with service PMI’s turning a corner, ( 54.0 vs 53.0 forecasted), following a beat in both construction and manufacturing data of late. The positive data has shifted BoE rate expectations with the OIS now pricing in 7bpts of tightening for August and 17bpts by November. The pound rose to 1.3392 in London. Despite various gloomy headlines on Brexit negotiations, the pound stabilised at 1.3333 in NY and went on to rally as high as 1.3402, closing at 1.3392. As for the cross, The cross was down to 0.8743 on UK data beat vs 0.8785 as the early European high. EUR/GBP ended the NY session at 0.8749 and down -0.39%, having ranged between 0.8788-0.8724. IHS Markit said that the May PMIs point to UK GDP growing at 0.3-0.4% in Q2, ( note that the BoE kept rates unchanged in May after meagre GDP growth of just 0.1% in Q1).
USD/JPY’s four-day advance was capped by the 110 exporter hedging level where the yen picked up a bid as investors look around at all that is simmering away in the background on a geopolitical front. Firstly, the pair was unable to shake off the European nerves and lower US Treasury yields kept the pressure on in NY. The US 10yr Treasury yield dropped from 2.94% to 2.90% before clawing back to 2.92%. The 2yr yields dropped 2bp to 2.49%. USD/JPY dropped the 110 levels in Tokyo and traded as low as 109.47 before bulls picked up a bargain in later trade in NY, sending the pair back to 109.76. The pair advanced in early Asia to a high of 109.87.
As for the commodity complex, USD/CAD was weighted by oil’s bounce, and Loonie traded back below trend line resistance. The MXN was beaten up on diminished prospects of a NAFTA deal being done before 2019. Gold rallied $10 on a weaker DXY and copper climbed higher from 3.1250 to 3.2484. The Kiwi was two-way business, dropping from 0.7044 in European trade to 0.6997 in early NY before rallying back to 0.7035 lunchtime highs in NY. The pair was faded there down to a close of 0.7022. The latest GDT auction saw prices for most dairy products ease, with the GDT-TWI falling 1.3% and whole milk powder prices dipping 1.1% to US$3,205/tonne. The Aussie fell from 0.7650 early London to 0.7595 early NY before trimming losses to around 0.7615. “This meant AUD was the weakest G10 currency on the day, after being the strongest on Monday. With Australian GDP data looking strong, AUD’s underperformance is a little surprising, despite the return of jitters over Italy,” analysts at Westpac argued.
Key notes from US session
- Funda-FX wrap: plenty of fat to chew on, setting a market precedent
- Wall Street stocks: Nasdaq hit all-time-high along with Apple, Netflix and Amazon
Key events ahead in Asia
Analysts at Westpac offered their outlook for today’s key scheduled events as follows: “Australia’s Q1 GDP data is due at 11:30am Syd/9:30am Sing/HK. Expectations have risen after the various partial data over the past week or two. Indeed, if growth is 1.1%qtr as Westpac forecasts, it would be the strongest quarter since Q4 2011. To be sure, this is partly a rebound from the dismal 0.4% in Q4 2017; specifically, net exports look to have swung from a -0.5 percentage point subtraction from growth to a 0.3ppt contribution. Consensus is 0.9%qtr, 2.8%yr. The gap with Westpac’s forecast may be on household consumption, where we concede downside risks if the saving rate doesn’t fall further, given that it was not a great quarter for retailers.
A gain of 1.1% should produce annual growth of 3.0%yr, which would obviously be very welcome in Canberra and at the RBA, where forecasts are for 3+% growth this year and the next. But Australia has managed a grand total of one quarter (Q2 2016) with annual growth at or above 3% since 2012. We expect that it will remain difficult to maintain growth at this pace.”
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