The USD suffered a V-shaped turnaround, in other words, in a matter of hours its outlook went from steady bullish to now head into Friday with clear fragility to further losses.
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The USD suffered a V-shaped turnaround, in other words, in a matter of hours its outlook went from steady bullish to now head into Friday with clear fragility to further losses. The culprit, after correlating price action to fundamental news, has been attributed to a surprisingly low US PMI read, paired with soft new home sales in the US. In stark contrast, the resumption of a risk aversion with both equities and global yields experiencing sharp slides led to the strong appreciation of the Yen (and Swissy). The Canadian Dollar, amid the continuous collapse in the price of Oil in a risk-off environment, succumbed for the second day in a row, while the Sterling also traded primarily lower, even if the overall weak performance was much more contained as the market appears to have fully priced in the resignation of Theresa May as British PM. The three currencies that managed to keep up with the Yen (and Swissy), albeit at a significant distance, were the Euro, the Aussie, and the Kiwi, in what's seen as a rise on the demerits of the USD only.
Narratives In Financial Markets
* The Information is gathered after scanning top publications including the FT, WSJ, Reuters, Bloomberg, ForexLive, Institutional Bank Research reports.
Fragile risk dynamics leads to US equities and yields across the maturity spectrum selling off quite sharply as the narrative on the US-China trade conundrum worsens by the day.
The lead taken by US equities from European stocks performance was a pretty gloomy one, as both the German and European PMI series fell further into the red, re-igniting the idea that the global growth slowdown keeps spreading across the wider European continent.
The USD joins the offered tone in risk as the flash Markit US PMI underwhelms by barely staying above the 50.00 mark (50.9 vs 53.6 exp), interpreted as a significant shocker. The services component also fell to 50. Vs 52.6 exp. Another culprit was seen on the decline in US new home sales, which despite being a volatile indicator, added to the negative mood.
The setback in the US Dollar goes against the recent pattern of a steady appreciation no matter the risk profile as EM capital headed back into the US. Receding flows into USD-denominated assets (repatriation or into money markets) may explain the turnaround.
Moody's Analytics warns that if the 10-year Treasury yield’s month-long average drops to 2.25% or lower, the FOMC may cut fed funds at its next quarterly meeting. As inferred from the CME Group’s FedWatch Tool, the futures market recently assigned an implied probability of 79% to a Fed rate cut by the end of 2019. In view of the underutilization of the world’s productive resources, low inflation should help to rein in Treasury bond yields.
UK Theresa May is expected to announce on Friday her timetable to step down as Prime Minister, with some reports suggesting that a leadership contest will begin from June 10th.
US President Trump kept attacking China via tweets by noting their unfair decade-long practices in trade activities while announcing an economic aid package to farmers/ranchers who may be hit the hardest by what’s believed to be a protracted cold war in trade and tech. Trump also confirmed that he will meet China’s President Xi at the Osaka G20 summit in June. Lastly, Trump said, “if the deal happens, that would be great, if not, that’s fine.”
On the Huawei rife, US Secretary of State Pompeo said that there is a real risk from China towards US national security, adding that US companies are going to cut ties with Huawei. Pompeo also said that Huawei is deeply tied to China’s communist party. The more embroiled the issue with Huawei restriction/ban becomes, the harder to get a trade deal.
In the next 24h, the focus will be on the US durable goods orders, which takes an even higher degree of importance after the USD selloff was attributed to poorer US fundamentals.
Over the weekend, the European parliamentary elections will take place. Votes from 28 EU countries will elect 751 members to the European Union.
Recent Economic Indicators & Events Ahead
RORO (Risk On, Risk Off Conditions)
Yesterday, I concluded that the overall risk environment was such that I felt inclined to think we were on the cusp of another round of 'risk off' on Thursday. Long and behold, the pendulum has effectively moved quite aggressively back into risk aversion mode as both US equities and US yields revert back to bearish tendencies from a micro and macro standpoint. The S&P 500, as our bellwether, resumed its downtrend with the technical backing of a bearish structure playing out. In the fixed-income space, the hammering of US yields follows a week-long of consolidation, with the extension of the selloff quite impressive as the US 30y yield makes a fresh low at 2.73%.
In the currency space, the Yen, alongside the Swissy (not covered in the report), were the absolute stars, in what’s a clear reflection of ‘true risk off’ flows. Granted, the bearish turnaround in the USD was not quite the scenario one would have expected as part of the ‘risk off’ script playing out, with the fall being almost fully attributed to a raft of negative US fundamentals. When turning the attention to China’s assets, both the stock index performance in Shanghai and the USD/CNH, continue to imply that a protracted trade dispute between the US and China on trade is here to stay, which should remain at the core of one’s macro assessment to fade spells of overextended ‘risk appetite’.
Latest Key Developments In FX (Technicals, Fundamentals, Intermarket)
EUR/USD: V-shaped Structure Negates Bearish Bias
GBP/USD: Range Formation, Risk Of Head Fakes
USD/JPY: Sharp Selloff On Perfect Intermarket Bearish Storm
AUD/USD: Buyers Return To Break Topside Of The Range
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Fundamentals: It’s important to highlight that the daily market outlook provided in this report is subject to the impact of the fundamental news. Any unexpected news may cause the price to behave erratically in the short term.
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