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Analysts at Westpac explained that the improvement in risk sentiment seen in Asia after the US backed off its threatened tariffs on Chinese imports extended to US trade, with equities posting sharp gains.  

Key Quotes:

“Commodity currencies led the way, with oil and copper bouncing though iron ore took a step back.”

“EUR/USD initially made a five-month low at 1.1717 but reversed in NY trade as the US dollar lost steam, to 1.1790. European equities mostly did not join the risk-on mood, with Italy partly to blame. The ratification of Italy’s populist/extremist coalition is all but done. Concerns over the potential fiscal blowout risks from their core policies caused Milan shares to close -1.5% and Italian government bonds to sell off further. The  10 year  Italian bond yield jumped 16bp to 2.39%; a week ago it was just 1.93%. The nerves  spilled  over to Portugal, whose benchmark  10 year  bond yield jumped 12bp.

AUD outperformed the majors, starting its rally in early London from 0.7505 and extending gains through the NY session to 1% on the day, printing three-week highs around 0.7585. NZD also bounced, from 0.6885 to 0.6950, having fallen earlier on the soft NZ retail sales data. AUD/NZD rose from 1.0890 to 1.0928, keeping the month-old rally intact.

USD/JPY reversed from a four-month high at 111.40 to 111.00, perhaps weighed by the US 10yr treasury yield which edged down from 3.08% to 3.06%. 2yr yields were perkier, rising with risk sentiment from 2.55% to 2.57%. Fed fund futures yields continued to predict a rate hike in June (100% chance), plus at least another by year end.

There was no major data to report on, but we heard from Fed speakers. Harker said the economy was doing well and expected two more rate hikes this year, and Bostic said the Fed is close to its two goals, while dove Kashkari said the Fed should not hike too quickly because wage growth is slow.”