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USD higher as 10-year bonds approach 3.0% yield. EUR lower after PMI data

By Nick Parsons

The US Dollar opens after a very good week, finishing top of the major currency league table. It wasn’t a linear performance, however. Its index against a basket of major currencies opened on Monday at 89.35 and dipped as low as 88.80 by Tuesday morning in Europe. From then on, a combination of soft economic data in the UK and Eurozone and much higher US bond yields pushed the USD index up to a high of 90.0 before closing in New York on Friday at 89.90. This morning in Europe, it has reached 90.25; its best level since back on February 28th.

For US equity market markets, this is the week when the first quarter earnings season really gets into full swing. So far, 17% of the companies in the S&P 500 index have reported their numbers but this week 179 are scheduled to give earnings releases, 12 of which are also in the 30-member DJIA). It is fair to say that with investor attention on trade, tariffs, China, Russia and Syria, earnings haven’t so far grabbed investors’ collective attention. According to data from FactSet, the market is rewarding upside US earnings surprises less than average (+0.1% compared to 5-yr average of +1.1%) and punishing downside earnings surprises less than usual (-0.9% vs. 5-yr average -2.4%). Today’s big corporate names to report include Google and Halliburton.

US bond yields rose sharply last week with 10-year Treasuries hitting a closing high of 2.96% on Friday; the highest since January 10th 2014 after reaching an intra-day high of 2.98%. The two-year yield, meantime, hit 2.461 percent, its highest level since September 8th 2008. Fresh worries about inflation were the main driver of this move and although Markit’s version of the PMI surveys is usually ignored by investors who prefer to focus on the ISM number, the ‘flash estimate’ of the PMI today will be watched closely for any clues it may offer about price pressures. The USD index opens this morning in North America around 90.20.

The Canadian Dollar started last week pretty well ahead of the Bank of Canada Meeting but finished it on a downbeat note after softer than expected economic data on Friday. Overall it gained against the GBP and NZD, was little changed against the AUD but lost out to the EUR and US Dollar. USD/CAD ended the week at 1.2765 but has risen almost a quarter of a cent in Europe this morning on the back of a generally stronger USD and slightly weaker oil prices, with WTI crude down almost 50 cents at $67.90.

Last week, Canadian Foreign Minister Chrystia Freeland said Canadian, Mexican and US ministers seeking to revamp the North American Free Trade Agreement (NAFTA) had made good progress on the key question of autos. Asked about a report that the United States wanted a deal in the next three weeks, she said, “Our commitment is to get a really good win-win-win outcome as quickly as possible and... we’ll work as long as it takes to get a great deal”. Speaking at the Canadian High Commission in London, her boss and Prime Minister Justin Trudeau told reporters, “So we’ve seen an opportunity to make significant progress on the NAFTA file… We’re making sure that we’re engaging in a way that is as fulsome and comprehensive as possible.”

The Bank of Canada Statement last week concluded that, “higher interest rates will be warranted over time… but the Governing Council will remain cautious with respect to future policy adjustments, guided by incoming data.” The first of that new data came on Friday and was softer than consensus expectations. Core retail sales were unchanged in March against forecasts of a +0.3% increase whilst headline inflation edged up only to 2.3% versus the 2.4% which had been expected. Governor Stephen Poloz will today appear before the House of Commons Standing Committee on Finance. He will be accompanied by Senior Deputy Governor Carolyn A. Wilkins and is sure to be questioned on progress and risks around NAFTA talks, as well as last week’s interest rate decision. The Canadian Dollar opens in North America at USD/CAD1.2790, AUD/CAD0.9780 and GBP/CAD1.7860.

The EUR began this Monday morning after a mixed week in which it fell against a quite buoyant US Dollar but rose against all the other major currencies to take silver medal spot on the league table. On Friday afternoon, it tumbled on Friday after comments from ECB President Draghi sent EUR/USD down to a low of 1.2265; its weakest since Monday, April 9th. Overnight in Asia and this morning in Europe, the EUR failed to bounce in any meaningful way and from a technical perspective, the breakthrough last week’s low opened up a swift move down to 1.2230. If no support is found at current levels, the next downside target will be the March 1st low around 1.2170.

In yet another relatively disappointing piece of economic news, the ‘flash estimate’ of Markit’s Composite Eurozone PMI held steady at 55.2 in April, according survey data based on approximately 80% of final responses. The unchanged reading indicated the joint-weakest expansion of business output since the start of 2017, but remained well above the average of 53.8 seen over the past five years. Manufacturing again led the upturn, albeit with the rate of factory output growth slowing to a 17-month low. Service sector activity meanwhile rose at a rate only marginally faster than March’s seven-month low. Markit’s downbeat Press Release titled “Eurozone economy stays in lower gear” noted, “Output growth across the two sectors has fallen sharply since an 11 ½ year peak at the start of the year, in line with a slowdown in order book growth. Inflows of new orders rose at the weakest rate for 15 months in April. Factories reported the smallest gains in both total goods orders and export orders for a year-and-a half during April, the latter in part dampened by the recent strength of the euro, notably against the US dollar. New business inflows in the service sector meanwhile slipped to an eight-month low, adding to signs of a broad-based waning of demand growth both at home and in export markets.”

On Friday afternoon, President Mario Draghi acknowledged the Eurozone slowdown in a statement at the International Monetary Fund meetings in Washington, but maintained his optimism that the expansion will continue. “Notwithstanding the latest economic indicators, which suggest that the growth cycle may have peaked, the growth momentum is expected to continue.” There is an ECB Council meeting on Thursday this week, which explains why Mr Draghi’s comments on Friday were limited to the economy and made no mention of monetary policy. The EUR opens in North America today at USD1.2235 and EUR/CAD1.5645.

The British Pound began this Monday morning on a positive note after a very disappointing week in which it was kept off bottom spot in our league table only by the New Zealand Dollar, with GBP/USD ending down at 1.3995; its first time in a fortnight below 1.40. Overnight in Asia and this morning in Europe, the so-called ‘cable’ rate initially clawed back on to 1.40 and the GBP gained on all its crosses from its very depressed levels on Friday evening. Subsequently, GBP/USD has fallen victim to more general strength and has been down to 1.3960 even though it has held its gains against most of the other major currencies we follow closely here.

With the Easter holidays and parliamentary recess, we haven’t much on Brexit for several weeks, even as the clock ticks down to Britain’s formal withdrawal from the EU on March 29th next year. The House of Lords last week voted in favor of staying in the customs union post-Brexit though a Downing Street spokesperson this morning said, ““The position remains very clear: we don’t think staying in a customs union is the right thing to do and it isn’t government policy to do so.” On Thursday this week, there will be a non-binding vote in the House of Commons on a motion which urges the Government to remain in a customs union. According to a report in The Times this morning, “Theresa May will face calls from senior Brexit-supporting ministers to ditch her favored option for a customs deal with the EU at a meeting this week… as fears grow that she is paving the way for a compromise on the issue.”

In terms of economic numbers, this last full week of the month will develop very slowly indeed until the first quarter GDP numbers are released on Friday. There are the comprehensive housing loan data from trade association UK finance on Thursday and other private sector surveys will be published during the week but the GDP data and the market reaction to it could be crucial for expectations of the May 10th BoE MPC meeting. Ten days ago, the well-respected and often very accurate NIESR model said that GDP rose just 0.2% in Q1, largely due to severe weather in March which disrupted activity in all major sectors. The big question is whether this is a permanent loss of output or whether it will rebound in Q2. The British Pound opens in North America this morning at USD1.3960, GBP/EUR1.1420 and GBP/CAD1.7860.

After the big technical signal we highlighted here on Friday morning (a ‘key reversal day’ with a higher high, lower low and lower close than the previous day), AUD/USD has continued to come under pressure. Friday’s intra-day low of 0.7655 wasn’t quite the lowest of the year (that came around 0.7645 on March 28th) but the pair has fallen further in Europe this morning to a low of 0.7635; the weakest since December 15th. AUD/CAD is down slightly to 0.9775 though the AUD is steady against both the EUR and NZD.

Given the strength of the US Dollar over the last few days, the commodity price rally which had supported the Australian Dollar last week may be running out of steam, although the picture is quite mixed. Gold is down almost $30 from Thursday’s high of $1354 whilst nickel has tumbled from $16617 to just $14371; an 8% decline in just three trading days. Australia’s largest export commodity is still holding up, however, with both rebar and iron ore futures at one-month highs after news that Chinese rebar and iron ore inventories continued to decline last week. According to Thomson Reuters, citing data from Mysteel Consultancy, rebar inventories held by Chinese traders fell to 8.252 million tonnes, well below the 8.68 million tonne level reported a week earlier. Other steelmaking raw materials also rose on the Shanghai market. Coke jumped 3.4 percent to 1,922 yuan a tonne, having touched a five-month peak of 1,930 yuan initially, and coking coal increased 1.7 percent to 1,170.50 yuan.

The highlight for financial markets in Australia this week will be the publication of quarterly CPI numbers on Tuesday. The consensus is for an increase of between 0.4 and 0.5% in Q1 which would take the annual rate of inflation to between 1.8 and 1.9%. It is very frustrating for investors who have no monthly CPI numbers to find there are four different quarterly measures produced: headline, core, trimmed mean and weighted mean. The RBA target is for core inflation (excluding volatile items) between 2-3% but the Q1 numbers are likely to show only slow and gradual progress towards this goal, with consensus expectations centering on 1.9%. The Australian Dollar opens in North America this morning at USD0.7640, with AUD/NZD at 1.0650 and AUD/CAD0.9775.

The New Zealand Dollar had a very poor week, finishing down against every one of the major currencies we follow here. It was a story of persistent weakness rather than a single dramatic sell-off: for the first four days of this week it finished second from bottom, bottom, third-last and in second-last place on our one-day performance table. At Friday’s close in New York, NZD/USD was struggling to hold on to a US 72 cents big figure but in Europe this morning it has moved down on to 71 cents for the first time since March 29th.

Across the Tasman Sea, a growing number of conduct issues are being uncovered by Australia’s Royal Commission into the major banks. In line with his pledge to communicate better with the public, new RBNZ Governor Adrian Orr was on TV on Sunday. He said, “The true problem and challenge going on in Australia is cultural… New Zealand bank culture is infinitely better than some of the activity you’ve seen in Australia.” Orr said the RBNZ, which is the nation’s banking regulator, is watching the progress of the inquiry because Australia’s four biggest banks together hold about 90 percent of deposits in the New Zealand financial system, although he doesn’t see the need for a similar inquiry in New Zealand. Showing a gift for a quotable quote, the RBNZ chief then said, “Boards attesting and signing off on issues comes down to the moral fiber of the institution… Market discipline and self-discipline are critical. That’s sunlight coming in, and hopefully disinfectant.” Harsh words, indeed.

The week ahead has the ANZAC day holiday on Wednesday and after the excitement (for economists at least!) of last week’s CPI numbers, it will be split into two halves of second-tier data. We have the always fascinating visitor arrivals figures on Tuesday and the merchandise trade data on Friday but as we have seen on many occasions already this year, the NZD does not need any domestic economic or news catalysts to be propelled either to the top or the bottom of our daily currency performance table. The Kiwi Dollar opens in North America at USD0.7175 and NZD/CAD0.9180.