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US yields spiked to levels not seen since 2011

By OFX

Yesterday, US yields spiked to levels not seen since 2011. It all started in the Asian session, when the 10-year US Treasury yield broke above 3%, apparently on stop losses, and the USD started gaining momentum. More fuel was added to the fire as the US retails sales met expectations (except for the measure excluding Auto & gas) but most importantly, upside revisions were made to prior month reading. The 10-year Treasury ended the session seven pips higher, and the USD closed more than 0.7% stronger, although it lost a bit momentum towards the end of the session.

Today we will have Industrial Production for April, with the market expecting a 0.6% month-over-month the fundamental posted an increase of 0.7%. Building Permits for the US remained flat at 1.35 million, while Capacity Utilization came in slightly lower at 78.0% from expectations of 78.4%.

The International Energy Agency (IEA) has cut oil demand for 2018 from 1.5M to 1.4M barrels per day, citing a three year high in the price of oil as the main reason. The efforts of OPEC and its partners in curbing the 16-month oil glut and in addition to supply being cut market participants see supply waning as OPEC’s second-largest oil producer is being hit with US sanctions; Iran Nuclear Agreement was abolished by the US and sanctions are imminent. The price of West Texas Intermediate hit a high yesterday of 71.81 a barrel and has currently retracted to 71.00 as we write. Even with higher oil price the loonie has struggled to maintain its luster and has slipped into a reoccurring trend channel of 1.2830 to 1.2886 have testing major resistance yesterday of 1.2944.

NAFTA continues to hinder the loonie technical support levels of 1.2778 and 1.2738. The outlook for an agreement to be in writing for House Speaker Paul Ryan to get Congress to move and pass into law before the next Congress is voted into power in November looks very bleak. Market participants are keeping away from the loonie and the peso heading into the end of the week deadline.

On Friday we will have the current month over month sightings of CPI and Core Retail Sales for Canada previous readings of 0.3% and 0.0% respectively. The Bank of Canada is set to announce its interest rates and monetary policy report on May 30th; this is a day ahead of the 1st quarter GDP a critical metrics for the BOC to forecast future hikes. Market analysts are not anticipating that the BOC will tighten at the end of this month.

The euro has seen a pretty steep sell over the past couple of months as the Eurozone economy cools after booming in 2017. Growth figures from Germany, the EZ’s powerhouse, showed a faster than expected slowdown to 0.3% for Q1 from Q4 2017’s 0.6% reading. Along with the soft growth print, there was a negative German ZEW Economic Sentiment Survey result, the second in a row after a series of positive prints over the past 18 months.

The main reasons for the decline, trade tensions between China and the US and the recent withdrawal by the Trump administration from the Iranian nuclear treaty. Today sees Final CPI y/y from the Eurozone with no change from 1.2% predicted. GBP/EUR is back under 1.14, and the EURUSD sit at the 1.18 handle.

UK wages are now officially outpacing inflation latest numbers showed yesterday boosting the spending power of UK consumers. Wages excluding bonuses are rising at 2.9% 3m/y with CPI from the comparable period rising at 2.7%. It’s likely we will see a further widening of the spread in coming months as sterling’s fall in value since the EU Referendum is washed out of the equation and it inflation heads back down towards the 2% target.

Along with the wage number, we saw the Unemployment rate hold at 4.2% indicating a still tight UK labor market. The response from the pound was mixed, rising against the euro which was sold off yesterday but dropping against the dollar which had another positive day across the board. GBP/USD currently trades around 1.35

The Australian dollar suffered its second day of declines against the world's base currency with currency moves continuing to be mostly yield driven. With US 2 and 10-year treasury yields rallying to near decade highs overnight on the back of some strong US retail sales numbers, the AUD/USD slipped from 0.7520 to touch lows of 0.7448 before rebounding into this morning with the pair changing hands at 0.7472. These moves also coincided with falls in equities, gold and Iron Ore which only reinforced the downward pressure on the local currency.

In contrast to these declines against the world’s base currency, the Australian dollar fared considerably better against the other significant crosses mainly trading sideways against the NZD, EUR, and GBP while suffering a small decline against the CAD.

While traditionally not a market mover, this morning's Wage Price Index (WPI) release will be watched closely by markets who will be interested in gauging the level of wage growth acceleration. The index is expected to rise 0.6% with the analyst mainly expecting the annual rate to remain subdued around the 2.1% level. A strong 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.

Against the broader context of USD strength, the Kiwi has floundered, opening this morning around the 0.6860 mark. Down more than 7% for the month against the Greenback, the embattled Kiwi again listed amongst the worst performers with little direction on the domestic calendar to drive excitement. The New Zealand Dollar initially started the previous day in a holding pattern, trading within a tight range of 0.6893 to 0.6921 and looking to claw back losses on the release of offshore Chinese data. The catalyst, however, was found during the American session rather than Asian with the drop and volatility triggered by strong US retail data and rising 10-year treasury yields in the States.

The Aussie cross, unfortunately, provided little respite for the New Zealand Dollar, also registering a 3% loss in the space of a month. Across the Tasman, all eyes turn to Australia’s Quarterly Wage Price Index and Unemployment Rate for direction on the cross rate. With little on the horizon on the domestic front today, New Zealanders turn to Thursday’s Annual Budget release for further direction over the week.