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NAFTA deadline, US Treasury Yields rocket and political uncertainty in the EU continues

By OFX

The USD started the week almost flat, after being down more than 0.3% during the previous Friday session. On the back of a spike in US Treasury yields after stronger than expected US Sentiment data (University of Michigan U.S. sentiment Index came at 98.8 vs. 98.3 expected) and after three straight weeks of rising, the USD finally found some topside resistance at its 55-week moving average.

This week also saw US yields spiked to levels not seen since 2011. It all started in Wednesday's 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. Elsewhere, Federal Reserve member Kaplan spoke on Tuesday, highlighting 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.

In other news, markets this week paid close attention to US-China trade talks as China sent Vice Premier Liu He to Washington on Friday. Donald Trump paved the way for more constructive trade talks with China, helped by his recent green light to the US Commerce Department to save the Chinese company ZTE Corp. from bankruptcy. Key takeaways from the trade talks were Premier Liu imploring that the two countries should work together with mutual respect to promote stability. He said "China is willing to strive together with the United States to appropriately handle and resolve trade issues felt by both sides on a basis of mutual benefit". Trump has also called for the strengthening of trade and investment ties in sectors such as energy, manufacturing and agriculture, as well as pushing ahead work on intellectual property protection. The war of words between U.S. and China may intensify, but market participants believe action will be minimal.

NAFTA talks continued this week, with the looming informal May 18th deadline for US Congress to pass the new agreement into law before Congressional elections in November. As Friday approached, the U.S. trade czar Lighthizer declared that NAFTA countries were “nowhere near close to a deal” and that there were “gaping differences” on the likes of agriculture, dairy, and autos. This is negative news for the peso and loonie and is adding to losses for the MXNUSD and USDCAD currency pairs.

Elsewhere, Oil 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 had a rougher go as commodity traders 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 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. Consumer Price and Retail Sales figures were released on Friday. The CPI figure was flat at 0.1%, and Core Retail Sales fell to -0.2% from 0.0% previous. The Canadian dollar managed to remain range bound from 1.2779 to 1.2830 ahead of the number but has dropped significantly as trader’s price out any possibility of a rate hike from the BOC at the end of this month with the inflation gauge flat. Primary resistance remains at 1.2886 level.

Heading into a Canadian long weekend to celebrate Victoria Day. Oil and Gold remain flat from there North American closing prices from yesterday at $71.50 and $1287.00 respectively.

It's seemingly been a while since we last talked of the risks towards the euro from political uncertainty, however similar to Brexit headlines these are creeping back to the fore with the prospect of a coalition between the anti-establishment parties, the Five Star Movement and Northern League, looking more and more likely.

The euro has seen a pretty steep sell over the past couple of months as the Eurozone economy cools after booming in 2017 and this week was no different. 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 were given as trade tensions between China and the US and the recent withdrawal by the Trump administration from the Iranian nuclear treaty.

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.

The week kicked off with the UK’s wage growth figures on Tuesday as well as the latest jobs numbers. Following on from a particularly disappointing week last week for the sterling, these releases showed UK wages are now officially outpacing inflation, 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 labour market. The response from the pound was mixed, rising against the euro which was sold off but dropping against the dollar which had another positive session the board.

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 these numbers will be likely given extra scrutiny by investors.

The Australian dollar enjoyed a subdued and quiet start to the week offering little to excite investors and push recent bounds. This was echoed more broadly, with global markets largely passive through the week's early sessions.

Midweek, attention shifted to the all-important wage growth print. Whilst traditionally not a market mover, this quarterly print this time around was monitored closely by domestic traders as a strong print was bound to prompt speculation that consumer-led growth and inflation would pick up the pace. The print came in softer than anticipated and the AUD dropped to a weekly low around 0.7450.

Further weakness in the AUD was also driven by US treasury yields, with the 10 year and 2 year yield notes sitting comfortably above key markers and reaching their highest level in a decade at 3.1% and 2.59% respectively. USD aside, the Australian dollar fared considerably better against the other major crosses largely trading sideways against the NZD and GBP whilst strengthening against the CAD to finish off the week.

The New Zealand dollar opened the week looking to claw back losses over the past week. Kicking off with the absence of any domestic data, local markets continued to trade off last week's more dovish monetary policy statement from incoming RBNZ Governor Adrian Orr and the Kiwi floundered for the most part against the broader context of USD strength.

While finding support after hitting six-month lows, the New Zealand Dollar edged lower at the tail end of the week against the Greenback following strong US bond yields and positive US economic data overnight. Down more than 7% for the month, the embattled Kiwi again listed amongst the worst performers with little direction on the domestic calendar to drive excitement.