Daily FX Wrap: USD weakness all round as healthcare vote failure prompts Treasury buying/ USD/JPY tests 110.00, while EUR/USD pips 1.0900. Cable tips 1.2600 despite A50 activation ahead. CAD softens on Oil price hit, while AUD underperforms. The ZAR hit after Fin MIn Gordhan ordered back to SA. US Treasuries have been the primary driver of FX markets, as the post health-care sell off in yield saw the USD hit lower across the board, but notable gainers being the JPY, EUR and CHF, and despite the looming activation of Article 50, GBP. Along the run, the 2yr has been trimmed to 1.24%, while in the belly of the curve, losses have seen the 5yr move just below 1.90% and the key 10yr rate eyeing 2.30% again – 2.35% providing some near term support. USD/JPY has put in an initial attempt on 110.00, but stops through here look vulnerable, but rate differentials point to limited losses through here. Even though president Trump’s fiscal stimulus plans have been dealt a clear blow, with concessions within tax reform already being discussed (we are led to believe), it is worth a reminder that the Fed’s rate path has been largely evaluated on US economic performance precluding the impact of policy measures planned by the new administration.
Clearly this is data dependent, but in light of this, we doubt Tuesday’s numbers will add any major insight into whether we will get the 3 (2 more) rate hikes for 2017. Regional services and manufacturing indices (Dallas, Richmond) offer some colour on business activity, but less so wholesale inventories. US trade is of limited relevance at the present time. Fed speakers aplenty though, with chair Yellen accompanied by Kaplan, Powell and George. We are still watching the 10yr closely however, with the 2.30% mark noted above a key support reference for the greenback.
The data series in the EU zone continued with strong results from the German IFO report. The impact was somewhat diluted by the USD impact today, but we saw a clear prompt on EUR/USD to push for (and eventually breach) 1.0900 when the ECB’s Lautenschlager stated that the governing council should prepare for policy change. 1.0950 is the next level up top, with a 1.1000 test imminent on a break higher.
In recent episodes, this has coincided with moves in EUR/GBP, but with Cable equally
aggressive on the upside, the cross rate was confined to a tight range in the mid 0.8600’s today. Despite Wednesday’s scheduled activation of Article 50, GBP has been on a relentless push higher, but given the heavy short positioning in the Pound, we would expect a large chunk of this to have been covering interest. Whether the market believes GBP has been readjusted to fair value levels is perhaps a little too early to tell, but closer to 1.2700-1.2800, we would expect nervousness to re-emerge. Add to this sporadic EUR/GBP demand experienced into month end, and GBP buyers at these levels should be wary.
In the commodity linked currencies, we got a taste of how the Oil price correlation with the CAD is starting to filter back in. The spot rate has been naturally cautious ahead of 1.3300, and we expect this relatively tight price action to continue between 1.2950 and 1.3550 in the near term unless we get some stronger price action in WTI, and or Canadian data backs up some of the recent growth and payrolls data. The BoC stance overrides for now, and to that end, gov Poloz is due to speak tomorrow. Markets will focus on any change in the cautious tone maintained of late.
AUD continues to lose ground against its NZD counterpart, dropping below 1.0800. Part of this is down to the losses seen in Copper and base metals generally, but NZD/USD has developed some resilience after Moody’s endorsement of the domestic economy last week. AUD/USD support ahead of 0.7600 looks tentative at best, to the point where an eventual USD turn looks set to take out stops through 0.7590 at the very least. RBA assistant gov Debelle speaks early on in the overnight session ahead. A big move in USD/ZAR today after South Africa’s Fin Min Gordhan was ordered back from an ‘unauthorised’ international roadshow by president Zuma. The details are still unclear, but local speculation of a cabinet reshuffle has perpetuated, with the spot rate having rallied from 12.35 to 12.50+, hitting highs through 12.80 later on.
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