In a slow news day there has been a modest reversal of recent trends, with the USD and UST yields both higher. The VIX index is flat around 14½, and the S&P500 is flat after some mixed earnings results.
The USD is up on all the major crosses, finding some support after a weak run, with the major currency TWI up about 0.4%. Commodity currencies are at the bottom of the leaderboard, with the NZD, AUD and CAD down in the order of 0.6-0.8%. Commodity prices are generally softer, with Bloomberg’s commodity price index down 0.8%, marking a near 2% fall for the week so far. Crude oil prices are down in the order of 3½-4%, following a report that showed a surprise increase in US gasoline inventories and crude production rising to its highest level in over 18 months.
The AUD has been the worst performer, falling steadily before finding some support around the 0.75 mark. The move lower has come despite iron ore prices rising by about 2% yesterday, a rare increase after its recent tumble. The NZD has fallen to around 0.7000 despite dairy prices continue to lift. The NZX whole milk powder future for June has nudged up to $3250. That follows the third solid GDT dairy auction in a row in a market that seems to be seeing improved demand. NZDAUD is up 0.3% for the day to 0.9340 after earlier reaching a 7-week high of 0.9365.
After yesterday’s surge in GBP after PM May called a snap election, the currency has come off the boil and is 0.4% lower at just below 1.28. The PM won overwhelming support in Parliament to push ahead for the 8 June election. In reference to Brexit negotiations she told the house that “…every vote for the Conservatives will make it harder for those who want to stop me from getting the job done”. The pullback in GBP might reflect some scepticism that anything much has changed for the UK ahead of its arduous negotiations with the EU. While Britain’s hand might be slightly stronger, the EU still holds the ace cards.
Against the stronger USD, EUR has been one of the better performers, down only slightly to 1.0720. Final CPI figures for March confirmed the drop in annual headline and core inflation, the latter down to 0.7% y/y, reducing the chance of the ECB changing its policy tone at its next meeting. The key near term risk for the common currency is Sunday’s first round of the French Presidential election, with the polls showing a tight race between the top four candidates. We see modest upside risk to EUR if Macron or Fillon win the first round but significant downside risk if Le Pen and Melenshon win the top two slots to face the second round.
USD/JPY is up 0.3% to 108.80, supported by higher US Treasury yields, with rates 1-3bps higher across the curve. The 10-year rate sits around 2.20%, up from the fresh lows for the year seen yesterday. Higher US rates might have been influenced by the circa 5bps rise in UK and Germany 10 year rates. After a big fall in global rates recently some serious questions are probably being asked about how much further they can fall.
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