- Forex today was looking as though the markets are finally waking up to the threat of higher inflation.
- There was a risk-off tone, especially in the EM-FX space.
Forex today was looking as though the markets are finally waking up to the threat of higher inflation, yet trade wars that not only will create a high degree of risk-off sentiment but potentially even be damaging to what has been an otherwise resilient performance in the US economy.
In early Asian trade, the NY Times came with an article stating that the White House analysis has found that President Trump’s tariffs will hurt growth, even as administration officials had been insisting otherwise.
However, the moves in FX today were before those headlines and indeed, the G7 nations gathering this weekend have been a weight on risk sentiment considering Trump’s switch up in tactics with respect to tariffs on the EU, Mexico and Canada and the lack of positive progress in negotiations between Washington and Bejing. Also, but not least, we have the historic summit between the US and N.Korea just around the corner and indeed the three central bank meetings, the FOMC, BoJ and the ECB.
There was a risk-off tone, especially in the EM-FX space. “Tensions remain in selected emerging markets, with Turkey continuing its defence of the lira with a 125bp rate hike to 17.75% and sharp losses on the South African rand, Mexican peso and Brazilian real,” analysts at Westpac explained.
As far as US treasury yields went, the ten years drifted up from 2.97% to 2.99% in the London morning, but then plunged to 2.88% in NY. The Fed funds futures continued to predict a rate hike next week and another by year end. The DXY ranged between 93.2130-93.5940.
Currency action
As for other currencies, EUR/USD was entering NY higher by +0.39% at the European close as the 10-year U.S./German yield spread narrowed to levels last seen mid-May due to rising bund yields on ECB’s recent rhetoric and sighting next week’s meeting a date to start discussion of putting an end to their massive bond purchasing programme.
There had been little in the way of an impact on the market following the Eurozone’s final Q1 GDP headlines that were unrevised at 0.4%qtr, 2.5%yr. German April factory orders (exp. +0.8%m/m) surprised with a -2.5%m/m fall. In NY, EUR/USD ended at 1.1810, unable to continue through the new high set overnight.
Sterling was taking on a lot of heat due to the continued problems associated with the Irish border within the Brexit negotiations, however, the pound absorbed the risks and in fact, ended pretty much flat. GBP/USD was ending NY slightly up by +0.06% at 1.3414, dropping back from the 1.3472 high on the UK home prices beat, but rising up from the 1.3368 lows over the continued Brexit angst. As for the cross, the euro take the top spot vs the dollar and EUR/GBP climbed on short covering to finish the NY session higher by +0.21% at 0.8798 within the session’s range of between 0.8838-0.8777.
USD/JPY was sent back from the recent highs, 110.26 through the 200-D SMA at 110.18 as risk sentiment flipped, sending the pair down to as low as 109.48 before it stabilised around 109.70, (kijun at 109.76) on next that Abe’s and Trump’s meeting ended well. Trump vowed to improve the trading relationship with Japan and said that Abe promised Japan would invest more in the U.S. (However, there was no talk about metals tariffs or removing auto tariffs threat though).
As far as the Commodity complex went, higher-beta FX was on the backfoot despite higher oil was lower while Venezuela struggled to fulfil their nation’s export commitments. Gold was also perky, but copper failed to hold onto its gains and fell heavily as NY got going. The Aussie gave up its previous day’s gains, weighed by the trade balance data from the previous Asian session and ended as the underperformer, but the drop was not dramatised from 0.7655 in the London morning to around 0.7620 late NY. NZD dropped from 0.7055 to 0.7025.
Key events from US/early Asia session
White House Analysis finds tariffs will hurt growth – New York Times
Wall Street stocks mixed ahead of Group of Seven summit
Funda-FX wrap: watching the bond run-off and implications for FOMC
Key events ahead in Asia
Analysts at Westpac note that China releases May trade data around 1pm Syd/11am local. “The median forecast in the Bloomberg survey is for the surplus to rise from $28bn to $33bn, with exports up 11%yr and imports up 18%yr in US$ terms. The rise in commodity prices alone should be enough to ensure swift growth in import values. China May consumer and producer price data is due Saturday. Inflation in China has not been a policy concern for some years,” the analysts explained.
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