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Forex today was a turnaround on the back of the relief in European markets where political risk, for now, seems to be somewhat abated by the Italians seeking to stabilise the disarray.

The PM-designate, Carlo Cottarelli, former IMF economist, selected after the failure of populist parties to get their cabinet approved said that discussions to form an interim government have been moving ahead. at the same time, Italy’s Di Maio of The 5 Star Movement had said earlier that they had never sought a euro exit and are willing to propose a new Finance Minister.  

As a result, the 10-year yields were in a reversal of yesterday’s flight to safety as follows:

  • Spain 1.551%, down 7 bps  
  • Italy 2.949%, down 21 bps  
  • Portugal 2.067%, -12.7 bps
  • Germany 0.373%, up 11. 4 bps
  • France 0.704%, up 4.8 bps
  • UK 1.254%, up 5. 7 bps

The US 10yr treasury yield also rose to 2.85% by late NY trade while 2yr yields recovered 6bp in London and NY trade to 2.41%. The Fed fund futures increased expectations of Fed hikes, to two hikes by year-end.

“The Bank of Canada held steady at 1.25% as widely expected but delivered a more upbeat message in their statement, shedding their “caution” regarding future policy adjustments and dropping a pledge to keep some “monetary accommodation” in place. This cements expectations for a 2nd hike in interest rates this year when they next meet July 11,”  

 – analyst sat Westpac explained.  

Currency action

The DXY range between 94.0380-94.9650 at the lower end of the scale as the euro picked up the bid.  The euro had rallied from 1.1509 to 1.1675. 23rd May low, in a reversal of the Italian political bloodbath that was Tuesday’s market. This followed a narrowing of the IT-DE and DE-US yield spreads. The move in the euro was perpetuated when shorts scrambled to cover, breaking the highs of yesterday’s business.  

Sterling was ending the North American session at 1.3279 and higher by +0.18% on the back of dollar weakness. GBP/USD traded in a range of between 1.3307-1.3242 in NY. (1.3293 was the European am high).  There are hints of further weakness given the pound was unable to hold onto gains through the 100-hr SMA at 1.3303, falling lower in late NY. As for the cross, EUR/GBP was higher by 50 pips in European trade to 0.8759, then trading higher between 0.8782-0.8704 in NY with the euro taking up the front seat on the relief rally.  

USD/JPY enjoyed a rebound in global equities and yields, climbing from 108.50 to around 109.07, closing near to there on the back of a bullish Beige Book, keeping the best for a June Fed hike on the table. Beige Book likely keeps June Fed hike on the agenda ahead of the nonfarm payrolls on Friday as a key risk for the pair. As for the higher beats, commodity-FX rallied hard. The CRB jumped after crude broke the five-day losing streak. CAD was also lifted by the hawkish BoC that seems no longer data dependent, holding trend resistance at 1.3050. The Kiwi popping like a ball trapped under water,  climbing 1.2% over the day to just shy of 0.7000 at 0.6998. As for AUD/USD that awaits China May NBS mfg PMI and AU Q1 CAPEX are data risks in Asia, the pair rallied hard in both Europe and the US session getting above the10 & 21-DSMAs to 0.7583 the high from 0.7476 Tuesday’s European lows.  

Keynotes from US session

Funda-FX Wrap: Italy is spreading a virus throughout global markets

Wall Street stocks rebound as oil rally overshadows Italy’s political drama

Key events ahead in Asia

Analysts at Westpac offered their outlook for today’s key events as follows: “Australia’s key data for the week is due at  11:30am  Syd/9:30 am Sing/HK – private capital expenditure. There will be interest in both actual business investment in Q1 (shaping forecasts for Q1 GDP data due  next Wednesday) and in investment intentions for 2018/19.

The median forecast on Bloomberg for Q1 capex is +1%qtr but Westpac looks for -0.8%. This is comprised of a flat reading on plant & equipment spending and -1.5% on buildings & structures. Last week’s construction survey indicated a small gain in infrastructure activity but weakness elsewhere.

We will see the 6th estimate of 2017/18 capex plans (previously around A$115bn) but most attention will be on the 2nd estimate of 2018/19. With the survey conducted in April and May, many businesses obviously don’t yet have firm plans for the fiscal year starting in July but the RBA among others will be noting the survey with interest. Our baseline scenario is A$90bn (around +4%yr), with a softer outcome being around $86bn and an upside surprise perhaps $94bn.

Japan releases Apr industrial production data this morning. More market-sensitive is China’s official May surveys of manufacturing and services sentiment (11am  Syd/9am local). Consensus is 51.4 on manufacturing, 54.8 on services – both steady on the month. During London trade, we will see India Q1 GDP, expected to hold steady at 7.2%yr.”