Despite the S&P edging slightly higher to close 1pt above Friday’s high, equities spent the majority of the day gyrating between positive and negative levels after a seasonal adjustment error with the US ISM Manufacturing survey caused confusion for market participants, finally settling right around the median consensus after two revisions at 55.4. The pain being experienced by those short US treasuries seems to have abated for the time being, with yields jumping the most in seven weeks as the 10-year yield climbed back above the 2.5% handle. The spread between the US and Canadian 5-year debt moved back into positive territory, something that hasn’t been sustained since the middle of 2009, and led USDCAD back for a test of the 1.09 level. Although the rally in USDCAD on the back of firmer treasury yields occurred, the divergence between the spread measure and spot remain at some of it’s widest levels over the past two years, warning a snap-back for USDCAD could materialize if the two recouple. Overnight action saw investor sentiment start off with optimistic undertones, after the government conducted Chinese Non-Manufacturing PMI survey climbed to a six month high at 55.5 and the Bank of Japan’s Kuroda told Japanese parliament that it was still too early to begin thinking about an exit plan from the quantitative easing program. Signals the targeted stimulus measures in China appear to be taking hold as demand for new orders increases, and the calming fact that the Bank of Japan is in no rush to scale back it’s asset purchase program, boosted the Nikkei to a gain of 0.66%, while USDJPY remained flat in the mid-102s. On central bank watch, the Reserve Bank of Australia as expected elected to leave interest rates on hold at 2.5% at the conclusion of their monetary policy meeting overnight. While Governor Stevens noted there were signs of diversification of investment in non-resource industries, he continued to speak dovishly about the domestic currency, highlighting that it remained high by historical standards, especially considering the softness in commodity prices. In addition to the RBA interest rate decision and the accompanying statement, Australia also reported a narrow current account deficit for Q1 than expected, and could signal an upside risk to the GDP report released tonight given that net exports are now expected to contribute more to growth in Q1 than previously forecast. So despite Stevens trying to put downward pressure on the Antipodean currency via the rate statement overnight, AUDUSD is generating a bid tone this morning as investors position ahead of tonight’s GDP data, pushing AUDUSD into the high-0.92s. Turning our attention to Europe, as expected the soft regional CPI reports released yesterday weighed on the flash reading for the overall zone, dragging the headline reading from +0.7% to +0.5% on a y/o/y basis, and essentially assuring some form of action from the European Central Bank on Thursday. The price action of the EUR after confirmation disinflation continues to be an issue throughout the zone was noteworthy, and speaks volumes about the market’s overall position heading into Thursday’s meeting. After a quick test south of the 1.36 handle, EURUSD managed to recover and is now making its way back up to the mid-1.36s, suggesting the market is short EUR and is strategically looking for opportune times to cover. Therefore, for corporates that are naturally short EUR it might be a good idea to look at covering off some of your short-term requirements, just in case the ECB acts according to general market consensus on Thursday, and traders that have been short the EUR since early May look to cover. Heading into the North American open, sentiment has soured somewhat since the positive close in Asia, with S&P futures looking like investors are key to trim some high-yield positions after the opening bell rings. The associated flow of funds is not seeping back into the bond market, with the 10-year treasury continuing to pare its recent rally as yields edge back up to 2.55%. The commodity complex is mixed this morning, with front-month WTI essentially flat at $102.5/barrel, while copper futures are well offered as the brown metal sinks to $312/lb. The Loonie is having trouble finding solid ground even after the better than expected Chinese data and the positive performance of the Aussie, instead coming under marginal selling pressure as yields in the US cull their downward momentum. Looking ahead to tomorrow, there are a number of event risk that Loonie traders should be cognizant of, front and center being the Bank of Canada rate announcement due at 10:00EST. While there is no expectations for any change in the overnight lending rate, traders will be keenly focused on the language contained within the statement, and whether it signals a change in stance towards monetary policy going forward. Given the headline CPI reading in May hit the 2% mark and traders have been positioning for a slightly less downbeat BoC when referencing the inflation environment in Canada, we see the risk for USDCAD being to the upside should Poloz downplay the rise in energy prices, citing them as transitory in nature. Also on the docket for the Loonie, trade balance figures for the month of April are set to be released at 08:00EST, just before the BoC announcement. Export growth in March moderated after a decent pop in February, with the key factor for market participants being whether the upward trajectory in export growth can be maintained after the positive reading in February. Expectations are for exports to increase by a slightly larger amount than imports, pushing the trade surplus to a positive $0.20bn, but still lower than the $0.80bn posted in February. A larger than expected surplus would help bolster demand for the Loonie, although we are skeptical considering the soft economic performance from the US in Q1 may have some hang-over effects on the Canadian export sector, combined with the fact that the Loonie strengthened almost 4% from mid-March to early April. Make sure to speak with your dealing teams heading into tomorrow’s event risk, as any surprise announcements could shake USDCAD from the lack of volatility witnessed over the course of May.
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