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USD remains firm as 10-year yields break above 3.0%. Stock markets lower again after Tuesday plunge

By Nick Parsons

All the drama in the US on Tuesday came in the equity market rather than in foreign exchange. We wrote here 24 hours ago that, “If equities take a sudden lurch lower, then the rally in bonds and the USD might well run into some resistance.” The S+P 500 index fell 60 points from its high and the DJIA at one point was down 800 points from its best level yesterday as the seemingly relentless rise in bond yields eventually took its toll on the stock market. The USD index against a basket of major currencies opened around 90.50, reached a high around 90.60 then slipped gradually to a close around 90.35. In Europe this morning, the USD has been up to 90.70; its best level since January 12th.It has broken above its 100-day moving average and now eyes the 200-day measure at 92.00.

The yield on US 10-year Treasuries yesterday broke above 3.0% for the first time since January 2014 and have been up to 3.02% this morning in Europe, although it is worth noting that 30-year yields are actually around 15bp lower than their highs earlier this year. There is nothing magical about the 3% threshold, other than a change of ‘big figure’ which of itself draws plenty of media interest. Overall, yields are up 61bp since the beginning of this year as the bond market faces the prospect of higher inflation, much greater supply from an increase in government borrowing, and a US Central Bank which is reducing the amount of bonds it bought during the period of Quantitative Easing.

In other news, US President Donald Trump and French President Emmanuel Macron pledged on Tuesday to seek stronger measures to contain Iran, but Trump refrained from committing to staying in a 2015 nuclear deal and threatened Tehran with retaliation if it restarted its nuclear programme. “If Iran threatens us, they are going to pay a price like few countries have ever paid.” This is the sixth time the two presidents have met, with the most notable being Trump’s trip to Paris for the Bastille Day parade on 14 July last year. Since Macron came to power, the two presidents have had about 20 phone calls together, according to the Elysée Palace. Talks today should move on from foreign policy to the more market-sensitive topics of trade and tariffs but there are no US economic statistics scheduled for release. The USD index opens this morning in North America around 90.60.

The Canadian Dollar has traded in a relatively tight range over the past 24 hours, not only on the same 1.28 ‘big figure’ for USD/CAD, but within just a 40-pip range from 1.2820 to 1.2860. Overnight in Asia and this morning in Europe, it has moved up towards the top of this band as traders reflect on a big fall in oil prices on Tuesday. WTI crude is down from a high of $69.25 yesterday afternoon to just $67.55 this morning and is definitely weighing on sentiment towards the CAD. This has also allowed GBP/CAD to regain 1.79 after trading on Friday as low as 1.7750.

US President Donald Trump said on Tuesday a new North American Free Trade Agreement could be agreed on quickly, as Canada hailed progress on forging new rules for the auto industry. Ministers from the United States, Canada and Mexico met in Washington to try to narrow differences on regional content rules for autos in the hope of tying up a deal in the coming days. “NAFTA, as you know, is moving along. They (Mexico) have an election coming up very soon,” Trump said at a Cabinet meeting briefly attended by reporters. “But we’re doing very nicely with NAFTA. I could make a deal really quickly, but I’m not sure that’s in the best interests of the United States. But we’ll see what happens.” Canadian Foreign Minister Chrystia Freeland, left a 3½ hour meeting with US Trade Representative Robert Lighthizer, saying there was progress on autos, which she described as “the heart” of NAFTA.

After his appearance on Monday afternoon before House of Commons Standing Committee on Finance, Bank of Canada Governor Stephen Poloz gets to do it all again today with the Committee on Banking, Trade and Commerce. It isn’t scheduled until 4.15pm local time, just after financial markets close for the day There are no other economic statistics released for the rest of this week. The Canadian Dollar opens in North America at USD/CAD1.2855, AUD/CAD0.9745 and GBP/CAD1.7940.

The euro had a mixed day on Tuesday, initially rallying against a very strong US Dollar but then recovering ground later in the day. It opened at 1.2215 but then fell on to a 1.21 ‘big figure’ for the first time since March 1st. The pair did manage to bounce without testing that day’s low of 1.2170 and by the end of the day was exactly half a cent up from its earlier levels. This morning in Europe, the euro has slipped back once more and hit a low just under 1.2190 before a very modest recovery to 1.22 with EUR/CAD back on 1.56.

Ahead of the ECB meeting in Frankfurt on Thursday this week, it was very surprising to hear Council members quoted this morning about the monetary policy outlook. The normal convention – though not a legally binding one – is for a black-out period of one week during which no clues are offered about the immediate or future decisions. This convention was broken not once, but several times today, although Lithuanian policymaker Vitas Vasiliauskas might argue in his defence that comments came in a published magazine article. He said, “The (bond) purchases will be ended gradually rather than abruptly, ensuring a smooth transition of sufficient length. Any further policy steps will be well-discussed, data-based and gradual, providing sufficient time for markets to adjust… We should be ready for an increase in market volatility, which has been exhibiting unnaturally low levels.”

Mr Vasiliauskas’ colleague, Yves Mersch, might offer a similar defence after his comments appeared on the website of Eurofi, which is convening a meeting of financial regulators. “Confidence has recently risen and convergence is being confirmed --partly because the temporary decline in the inflation rate has been weaker than our internal calculations had predicted… More resilience will follow eventually. Still, patience and persistence with respect to our monetary policy is required.” These are two words which are very likely to be repeated on Thursday by ECB President Draghi. The EUR opens in North America today at USD1.2210 and EUR/CAD1.5695.

The Pound rose steadily on Tuesday against all the major currencies we follow closely here and finished top of our one-day performance table. GBP/USD opened around 1.3940, eventually reaching a best level of 1.3980 just before the New York close. Overnight in Asia and this morning in Europe, it briefly extended these gains but couldn’t make it back on to a 1.40 ‘big figure’ and has subsequently slipped back to around 1.3960

With no economic statistics scheduled for release in the UK today, the markets’ focus is on politics. David Davis, the Brexit secretary, gave evidence to the House of Commons Brexit Committee this morning at the very early time for Parliamentarians of 9.15am. Mr. Davis said he wants the political agreement on trade in the autumn to be very detailed and that it should be possible to turn that into a treaty within six months. He said it is not the government’s intention to allow the trade negotiations to spill over into the transition period post-March 2019. According to the UK Press Association, “The motion put before parliament this autumn on the final Brexit agreement will be amendable by MPs and its outcome will be binding on the government. The Brexit secretary said the motion - which Prime Minister Theresa May has previously described as a “take it or leave it” choice - will relate to a political agreement expected to be reached with Brussels, rather than a full legal treaty. But he said it remains the government’s intention to have a treaty ready for signing immediately after the formal date of Brexit on March 29 2019.”

This afternoon, it is the turn of the Chancellor of the Exchequer, Philip Hammond, to give gives evidence to the House of Commons Treasury Committee. He should be in quite a confident move after yesterday’s news that public sector borrowing totaled £42.6bn in 2017/18, well below the Office for Budget Responsibility (OBR) forecast of £45.2bn March given in the Spring statement last month. The British Pound opens in North America this morning at USD1.3965, GBP/EUR1.1435 and GBP/CAD1.7950.

April 25th is celebrated as the ANZAC day holiday in both Australia and New Zealand, to honor the members of the members of the Australian and New Zealand Army Corps (ANZAC) who fought at Gallipoli against the Ottoman Empire during the First World War and the thousands of men who lost their lives there. Local financial markets were closed, though trading continued elsewhere in the Asia-Pacific region. For the Australian Dollar, the last 24 hours have been pretty brutal. AUD/USD fell from a high of 0.7680 yesterday morning to be clinging just on to 76 cents by the close in New York. Overnight, the pair fell further to 0.7565; its lowest level since December 12th, whilst AUD/Cad fell to a low just under 0.9750.

Australia is hoping to secure a permanent exemption to US steel tariffs before they come into force on May 1st but if not will have to rely on another temporary reprieve, the Australian Industry Group says. The deadline when US steel tariffs will apply to all countries including Australia is less than one week away and no permanent exemption has yet been put in place, according to the US Customs and Border Protection agency. Earlier this month, Australian trade minister, Steve Ciobo, said Malcolm Turnbull had “secured an agreement with the US president that Australia will be exempt and that continues to be the case”. The Australian Industry Group chief executive, Innes Willox, said, “We are hopeful that a new proclamation confirming Australia’s exemption will be made in the coming days, however, based on past experience, if the necessary instruments are not ready by 30 April, we expect that there will be an announcement extending our exemption by another 30 days.”

When traders locally get back to work on Thursday, they will have the quarterly export price numbers and the NAB Quarterly SME Survey but its an otherwise quiet end to the week for official economic statistics. Analysts will be poring over the detail of Tuesday’s CPI release to write their monthly updates, though there was probably not enough fresh news to make anyone change their well-established views on RBA monetary policy and interest rates. The Australian Dollar opens in North America this morning at USD0.7585, with AUD/NZD at 1.0690 and AUD/CAD0.9750.

The New Zealand Dollar has been totally friendless over the past 10 days and on Tuesday it once again finished bottom of our one-day performance table. Indeed, over the past five trading days, NZD/USD has traded on ‘big figures’ of 73, 72, 71 and now this morning 70 US cents. Today’s collapse to a low of just 0.7075 is the weakest point since January 3rd and will need to fall only a few more pips for headline writers to be reporting a fresh 2018 low. The NZD/CAD cross, meantime, has fallen more than 3 ½ cents from its high of 0.9495 on March 13th and this morning stands at its lowest level since early-February.

We highlighted yesterday the New Zealand visitor arrivals figures which showed the top source of inbound visitors in March 2018 was Australia, at 37% of all visitor arrivals followed by China and the US with 11% and the UK with 7%. The data showed 3.82 million visitors arrived in New Zealand in the year to March 2018; an increase of 276,200 (8 percent) from the previous year. Speaking in India this week, Tourism New Zealand regional manager, South and South-East Asia, Steven Dixon said, "In 2017-18, ending February, we hosted 62,000 travelers from India, which was 16.05 percent growth over the previous year. So, looking at the trend this year, which began in March, we expect the growth to be in double-digit as well." New Zealand government has set a target of 1,00,000 visitors from India by 2023, and if the growth continues at the current rate it will be achieved earlier. It’s time to look up the NZD/INR cross rate!

After today’s ANZAC day holiday, the next focus of attention locally in New Zealand will be the trade figures on Friday as well as the April consumer confidence numbers. The Kiwi Dollar opens in North America at USD0.7095 and NZD/CAD0.9125.