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An Inverted Yield Curve a Major Concern for the Fed

By OFX

Fundamentals for the US today we have Philly Fed Manufacturing, as well as Weekly Initial Jobless and Continuing Jobless Claims printing at 8:30 am. Fed speakers today are Kashkari and Kaplan. Yesterday incoming New York Fed President John Williams said it is nearing the time the Federal Reserve will stop holding the markets had. While James Bullard echoed other members concerns of not tightening too aggressively and causing an inverted yield curve, why the fear. An inverted yield curve is a predictor that an economic recession is possible a very big concern for the Fed.

Overnight global equity markets are mixed. Japan’s Topix closed higher by 0.5% and European indices also move up, yet US equities are pointing to a lower open with futures in the negative before the open. Gold continues it declines down as low as 1284.00 an ounce overnight and currently trades at 1287.

Canadian fundamentals are light today ahead of tomorrow’s Retail Sales and Consumer Price Index figures. What is of some interest today for market participants is the reading of Canadian Foreign Security Purchases, a higher reading of last month’s purchases of 3.96B would indicate the climate of foreign investors into Canadian securities which is CAD positive.

Oil continues to climb as Brent crude reach 80 dollars a barrel this morning for the first time since 2014. WTI follows Brent crudes signals and currently trades at 72.17 dpb at writing.

The main moves in the FX world came from the euro yesterday as unconfirmed reports emerged that the proposed Italian Five Star and Northern League government coalition were looking to ask the European Central Bank for €250b of debt forgiveness. The report which saw the euro plummet with EUR/USD dropping below 1.18 for the first time since December however it recovered as the report was denied as being official policy by the two populist parties.

Away from politics, yesterday saw Final Eurozone CPI for April unchanged at 1.2% y/y. With signs the Eurozone is slowing and inflation still way under target it seems likely a tapering of asset purchases will be announced at next month’s ECB interest rate decision rather than a stopping of the program altogether in September. EUR/USD trades at 1.1815 and GBP/EUR is holding above 1.14.

A relatively quiet end to the week from the UK with little data of note from the past 24 hours or indeed today/tomorrow. Sterling movement is likely to be driven by news from today’s EU leaders meeting in Bulgaria where informal talks are expected on Brexit. A report in The Daily Telegraph claiming that the UK was willing to stay in the Customs Union beyond 2021 had seen GBP/USD push towards 1.3550 overnight, however, the story has been denied this morning sending cable back towards the big number.

Looking ahead, next week’s crucial data will be UK CPI and Retail Sales numbers due on Wednesday and Thursday respectively. With Mark Carney highlighting the current weakness in the UK economy at this month’s interest rate decision investors will likely give these numbers extra scrutiny. GBP/USD hovers around 1.3520 at the moment.

The Australian Dollar edged back above the 0.75 cent handle through overnight trade on Wednesday buoyed by resurgent oil and copper prices. Despite softer than anticipated quarterly wage growth data and an intraday drop to lows below 0.7450 the Aussie found support in late afternoon trade and continued to recoup losses suffered through Tuesday as London, and New York traders entered the fray. Touching intraday highs at 0.7523, the AUD struggled to break resistance on approaches to 0.7530 as an uptick in US treasury yields capped gains.

Australian Employment changed was better than the anticipate 20K posting a 22.6K on jobs added to the economy while unemployment rate did move up a tick from 5.5% to 5.6%. With plenty of slack still in the Jobs market, a surprise uptick in job creation and participation did help prompt a rally through 0.7530, through the European session the AUD has pulled back toward psychological support of 0.75.

The New Zealand Dollar when valued against the world's reserve opens higher this morning. Having hit new 2018 lows of 0.6850 the NZD/USD has bounced back and opened today around 0.69c. The Kiwi appears to be taking a breather and has found some support after hitting six-month lows on Tuesday thanks mainly to strong USD demand. Overnight 10-year yields are softer back down to just under 3.09%, and second-tier US data came in a little weaker than expected to aid the Kiwi. On the AUD/NZD cross, it has preserved recent gains, ranging sideways between 1.0850 and 1.0900.

Looking ahead the New Zealand budget is scheduled for release today with interest rates expected to stay unchanged for quite some time and any negative surprise could send the Kiwi lower. On the technical front, support is seen at 0.6850 followed by 0.6830 and resistance up at 0.6900.