Empire State Manufacturing well above expectations
Tuesday 15 May, 2018
Daily Currency UpdateMarket participants look to US Retail Sales today for direction on currency pairs against the greenback. Core Retail Sales m/m for April posted a 0.3% worse than the consensus of 0.5%. Also released at 8:30 am eastern time was the NY Empire State Manufacturing Index the survey is a vital barometer of the manufacturing industry in New York state, and signaling to the market how well companies are adjusting to economic conditions, by factoring in spending, hiring, and investment. Expected was a reading of 20.1 and the survey was well above the 15.1 better than previous and consensus. Mid-morning we will have housing numbers, and business inventory survey figures reported. Housing is expected flat at 69, while inventories are projected at 0.3% a lower reading than the previous month of 0.6 Federal Reserve member Kaplan in an 8 am speech this morning said he is watching the yield curve and would not want to inadvertently invert. A June hike according to the market is a done deal at 97%, the focus turns to September and December which are 68% and 42% factored in respectively. Market participant like to get ahead of themselves so the anticipation of a hike in September is accelerating. The USD has moved higher against its G10 counterparts as market participants see the gap on trade talks between the US and China widening. This is sending equity market recoiling and futures a pointing to much lower open. Traders are moving for equities to treasuries the 10-year Treasury note pushed back above 3%.
Key MoversOil continues to be well supported as tensions remain high in the Middle East, and disruptions in the supply chain are a risk, WTI crude remains above the 71 dollars per barrel level. Gold has a rougher go as commodity trades move from gold to oil. The safe-haven trade of running to gold as inflation remains and higher interest rates are in the projections; commodity dealers see geopolitical risk in the Middle East a key driver in pushing oil prices higher. The loonie has not gained against the greenback but is making gains against the pound and the euro this morning. U.S., Canada, and Mexico the trio nations are set to more than likely miss House Speaker Paul Ryan’s deadline for the end of the week. This is negative news for the peso and loonie and is adding to losses for the MXNUSD and USDCAD currency pairs.
Yesterday saw further steps taken towards a loose coalition between the two anti-establishment parties in Italy, the Northern League and the Five Star Movement. While the Italian domestic markets took a small hit, this is a story that at the moment has failed to waver the euro. The current market view is that these two parties will climb down from their more radical policies and will not rip up the current fiscal prudence that is in place. This morning has seen Germany GDP mirror that of the Eurozone as expected as it has come in below expectations at 0.3%. Q1 GDP figures have proved to be particularly disappointing for the Eurozone recently, and Germany’s numbers are the weakest since Q3 2016. Looking ahead, let’s wait to see if today’s ZEW Economic Sentiment offers any optimism moving forward. EURUSD 1.20 which acted as a stiff resistance on yesterday’s session is null and void after support levels come into play as US equities sell-off. The 1.1860 support level has broken, and next support is the 1.18 handle.
After a very slow start to the trading week, there is the real opportunity for sterling to recover some of the losses that were suffered last week. The pound only swung 0.3% against the euro and 0.4% against the USD showing how quiet Monday indeed was – maybe the prospect of a royal wedding will excite the markets! Wage growth excluding bonuses is expected to increase to 2.9% further outstripping inflation, and we will have to wait for Thursday to see the latest CPI figures. As mentioned yesterday, a big hit in these wage numbers will be required to see a substantial recovery for the pound over the next week, however, even if this is the case the chances of an August interest rate hike (which is the next opportunity) are relatively slim. It is also interesting to note now that the next set of GDP figures will be released following the August interest rate meeting rather than beforehand which was the norm meaning that the focus will shift back to wage figures vs. inflation.
The Australian dollar enjoyed a subdued and quiet start to the week offering little to excite investors and push recent bounds. Maintaining a tight trading band and bouncing between 0.7545 and 0.7565 for much of the day the AUD edge lower throughout North American Trade as 10 year US Treasury yields edged higher touching 3% and 2-year notes touched a ten year high at 2.55%. The uptick in yields forced the Aussie lower into the close and we open this morning buying 0.7525 U.S Cents. While broader markets were largely passive through trade on Monday the slowdown in USD gains is perhaps indicative of a wider market trend and suggest the pace of US appreciation has moderated. As mentioned previously the AUD appears reasonable well supported at levels approaching 0.7430 and 0.74 and markets will need to see a consolidated break below these handles before gapping lower and extending the bearish downturn. Attentions this week turn to tomorrow’s all-important wage growth print. Released quarterly this read will be closely monitored by domestic traders. Wages have not kept pace with gains in employment and suggest there is still considerable slack within the economy. An intense read could prompt speculation that consumer-led growth and inflation will pick up the pace. However, a soft print will only affirm expectations the RBA will maintain a neutral policy stance in February 2019.
The New Zealand dollar opened the week looking to claw back losses over the past week at 0.6960 U.S. Cents. Absent from any domestic data yesterday, local markets continued to trade off last week’s more dovish monetary policy statement from incoming RBNZ Governor Adrian Orr. The Kiwi drifted from morning highs of 0.6975 with a change in sentiment in afternoon trade and into the offshore sessions, seeing a pullback to a low of 0.6910 and below the 200-day moving average. With a continuation of underperformance from the NZD/USD cross, there could be a test at first support levels of 0.6880. Across the Tasman, we see the release of RBA monetary Policy minutes for the month as the NZD/AUD rate continues to fall and potentially give up all gains for the year as we test January lows of 0.9180. The New Zealand dollar opens this morning at 0.6915 against the US Dollar and will look to take further cues from the release of Chinese data including retail sales.
- USD/CAD: 1.2805 - 1.2944 ▲
- EUR/USD: 1.1800 - 1.1900 ▼
- GBP/USD: 1.3450 - 1.3590 ▼
- AUD/USD: 0.7411 - 0.7482 ▼
- NZD/USD: 0.6814 - 0.6880 ▼