Monday's equity rally was another confirmation that the year's dominant market worry is the trading relationship between China and the US. Improved relations and detente over the past 2 days have led to a rally in risk assets with the Australian dollar being the top performer and the pound trailing. Earlier today, BoE's Carney reiterated that interest rates will rise at a timid pace, while USD broadens selloff. Silver and the ppund are the highest gainers since Tuesday's Asia open. The DOW30 Premium was stopped out at 25050 (High was 25085). Yesterday's trade is +70 pips in the green.
The US-China trade war going 'on hold' was cheered by markets as the S&P 500 climbed 20 points to 2733. China has offered to import more US energy and commodities in something we warned last week wouldn't be nearly enough to cut $200 billion from the US bilateral trade deficit. But if it's good enough for Trump and Mnuchin, then it's good enough for markets, at least for now.
It was instructive that the Australian dollar was the top beneficiary in FX. AUD/USD jumped to the highest since late April. Even cable showed some signs of life. After hitting a fresh 2018 low of 1.3391 it bounced back to 1.3433 to finish only narrowly lower.
The risk to the improved tone in markets is bonds. Treasury yields inched higher Monday but are now back within striking distance of multi-year highs. Keep a close eye on that market Tuesday.
USD started the week higher thanks to a relief in the US-China trade tensions and further losses in Italian bonds as the new coalition veers away from the basic budget requirement of the euro project. The odds of a Bank of Canada rate hike tumbled after soft reports Friday on CPI and retail sales. The Swiss franc was the top performer last week while the euro lagged. CFTC positioning data showed that kiwi longs have finally squared up. A new Premium trade has been adde with 3 charts & detailed note, identifying a crucial inverse H&S formation. The monthly chart is found below.
Canadian retail sales and CPI were the final two major pieces of the puzzle ahead of the May 30 BOC decision and the market was unsure what was coming. The implied odds of a hike were 42% before the data but plunged to 28% afterwards. Year-over-year CPI was up 2.2% compared to 2.3% while retail sales ex autos were a big disappointment at -0.2% m/m versus +0.5% expected.
In the aftermath USD/CAD jumped more than a cent and touched above 1.29. Also on Friday, the deadline that House leader Paul Ryan set for a NAFTA deal passed without any progress and US Trade Representative Lighthizer said the sides were nowhere near a deal.
At the moment, oil is supporting the Canadian dollar and that will continue to be a factor but no further near-term helps is coming from the BOC or trade negotiations, so the risks are tilted to the downside for the loonie (and upside for USD/CAD) . Note Canada is on holiday Monday. Here is Ashraf's latest on USDCAD.
In Europe, Italy is increasingly weighing on the common currency as jitters about a League/5-Star coalition continue after leaks last week suggested radical plans to cut debt including ECB monetization.
On the weekend, France warned its neighbour not to put regional stability at risk. The drop in EUR/CHF last week was undoubtedly impacted by safe haven flows as Italian stocks and bonds sank.For the week ahead, bonds will remain a major theme. US 10-year yields touched 3.12% on Friday before falling back to 3.05% but the better spot to watch in the short term may be US 30s and the cluster of resistance near 3.25%.
CFTC Commitments of TradersSpeculative net futures trader positions as of the close on Tuesday. Net short denoted by - long by +.
EUR +115K vs +120K prior GBP +6K vs +9K prior JPY +4K vs -5K prior CAD -24K vs -24K prior CHF -36K vs -32K prior AUD -23K vs -17K prior NZD +2K vs +13K prior
The bonfire of the New Zealand dollar may have a bit less fuel in the week ahead as battered longs have now completely covered. The next spot to worry might be the Swiss franc, but when have speculators ever been wrong in that pair before?
|Retail Sales (q/q)|
|0.1%||1.0%||1.4%||May 20 22:45|
The bond market continues to break down as US 30-year yields broke a major resistance level Thursday. Sterling was the top performer after some Brexit related news denials and confirmations, while the yen lagged. Key Canada CPI and retail sales data are due later today. 1 CAD Premium trade remains open.
The US 30-year yield has tried to break above 3.25% at least once in each of the past three years and consistently failed. That level also represents a long-term technical downtrend since the 1980s. On Thursday, the yield touched at high of 3.2545% compared to the 2015 high of 3.2546%. A break might open up a test of the 2014 highs near 4% and could signal a monumental shift in markets.
USD/JPY may already be signaling what will happen next. It rose for the fourth day on Thursday and posted the second close above the 200-day moving average. The US dollar was also lent some support from the economic calendar with the Philly Fed hitting 34.4 vs 21.0 expected.
EURUSD drops below 1.1800 after Italy's 5-Star Movement and far-right League published their joint government program, promising an escalation in govt spending that will re-awaken tensions with the European Union's budget criteria.
GBPUSD rose by a full cent to as high as 1.3580 in early Thursday on reports that the UK will stay in the EU Customs Union beyond 2021. The currency later fell after the reports were denied. Finally, sterling stabilized when the UK announced it would remain tied to EU customs union until the Irish border question is solved.
Later today, a critical set of datapoints from Canada is due as the final installments of top tier data before the Bank of Canada decision at month-end. CPI and retail sales are out at 8:30 EST, 12:30 GMT, 13:30 BST.
|0.3%||0.3%||May 18 12:30|
على الرغم من كل الاهتمام بإرتفاع الدولار الأمريكي، إلا أن نظيره الكندي لا يزال أقوى عملة أداء منذ بداية الشهر وبداية الربع السنوي. وقد وصلت المفاوضات لإنقاذ اتفاقية التجارة الحرة لأمريكا الشمالية (نافتا) إلى طريق مسدود دون عقد اجتماعات محددة. مع ذلك، لا يزال الدولار الكندي هو الأفضل أداءً (تحليل كامل)
Despite all the attention commanded by the US dollar, its Canadian counterpart remains the strongest performing currency since the start of the month and the beginning of the quarter. NAFTA negotiations have reached a new impasse but the loonie remains the top performer on improved pipeline politics. Full analysis.