This week’s theme has been weakness in commodity prices, driving down the commodity currencies, and that has continued overnight. Global commodity indices like the Bloomberg index and CRB index have made fresh lows for the year. A range of metal prices has been slammed, iron ore prices are limit down, and oil prices are down around 5%. WTI crude is flirting with USD 45, back to the level prevailing before OPEC’s supply agreement was initiated at the end of November.
In all cases for these commodities, supply concerns have been raised at a time when demand might be fading. PMI indicators in China have recently fallen and the PBoC has been engineering tighter liquidity conditions, driving money market rates higher.
The NZD, AUD, CAD and NOK are all at the bottom of the daily leaderboard. While falls have been modest, in the order of 0.3%, underperformance has been accumulating over time and in most cases fresh lows for the year have been made.
The AUD has been most affected by this theme over the past couple of days, seeing it lose about 1½ cents over that time. Overnight it reached its lowest level since early-January of 0.7383 and currently sits around 0.74.
The NZD has been dragged into this theme even though NZ commodity prices have held up all year. CBA’s NZ commodity price index is within 1% of where it began the year. Furthermore, with lower oil prices, NZ’s terms of trade are on a rising trend and the revered all-time high of 1973 looks to be threatened this quarter. The disconnect between the weak NZD and high terms of trade will be something the RBNZ considers as it finalises its forecasts. The NZD made a fresh low for the year of 0.6840 and currently sits at 0.6855, close to an area of strong technical support.
The USD has lost all its (modest) post-FOMC gains, trading slightly below the pre-FOMC level on the major currency index. The culprit has been EUR strength, with the common currency reaching its highest level for the year and currently sits 0.8% higher at 1.0975. Final PMI estimates for April supported the notion that a decent euro-area recovery was well advanced. Traders might also be cutting their short EUR positions as it looks increasingly likely that Macron will convincingly defeat Le Pen in the second round Presidential vote this weekend. Oddschecker gives a Macron win a 91% chance and polls give Macron a 22% lead in the vote. Another factor for EUR might be the change of tone from the ECB’s chief economist and known dove. Executive Board member Praet signalled that the central bank might not wait until “well past” the end of its asset-purchase programme before lifting rates, if the euro-area economy warrants faster tightening. Comments like this add to speculation that the ECB will change its policy guidance next month, removing some dovish overtones.
The US House of Congress has just passed the Republican bill to repeal and replace Obamacare by a narrow 4 vote margin. As yet, the independent CBO has not released estimates of the cost savings, which could go towards funding potential tax cuts. An earlier bill saved $150b over ten years, but the bill has since been modified. The market has become much less sensitive to any events in Washington of late.
GBP saw a dip and then a rise, on the anticipated announcement from Buckingham palace which initially raised some concern, but proved to be inconsequential for markets. The tailwind from a strong EUR has seen GBP lift to 1.2920. USD/JPY has slipped after earlier reaching 113 and trades this morning down 0.3% at 112.50, even though US Treasury rates have nudged higher.
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