US stocks rose, Pound hit a low of 1.3390
Markets switched to risk-on mode cheered by an easing in US-China trade tensions. Wall Street rallied while the US Dollar reversed gains after hitting 5-month highs. The Australian Dollar jumped 1% leading risk currencies (CAD, NZD) higher. Sterling’s wobbles extended, falling to December lows. US treasury yields were little-changed after their build last week.
Outlook: Optimism continued to rise that China and the US will avert a trade war. Which fuelled the market’s appetite for risk. While a potential deal with China is a possibility, details are sparse. What we have in place is a truce. Nevertheless, both world powers are determined to prevent a deterioration in relations. NAFTA negotiations continued with an agreement in principal between the participants expected this month.
In Italy, there were concerns that the fiscal plans of the coalition would cause upheaval for the economy. The substantial spending plans of the two parties are already at loggerheads with the European Union.
Trading View: “Live by the sword, die by the sword”. In this case, the risk is the sword. The Aussie, Kiwi and Loonie outperformed on the risk-on environment as they do. This gave the Euro and some other Majors a breather against the US Dollar. As we have seen recently the outlook on US-China trade can easily change. The truce needs to be turned into a deal.
US yields were steady. The 10-year bond yield was stuck at 3.06%. The 3.10% level may be a headwind for the 10-year and a pullback to around 3.0% is not impossible. The two-year yield lifted 2 basis points to 2.57%.
Philadelphia Federal Reserve President Patrick Harker (hawk) said he expects two more rate hikes this year, possibly another. This was countered by Minneapolis Fed Head Neel Kashkari (dove) said that the
labor market may still have some slack in it and wages remain suppressed. The path for US interest rates remains up.
The turmoil in some Emerging Markets continues to build. US funding costs have escalated. Indonesia hiked rates last week to defend the Indonesian Rupiah, pledging stronger measures to stabilize the currency. The US Dollar hit new highs against the Turkish Lira and Argentinian Peso.
The Dollar Index (USD/DXY) – slipped to 93.55 from 93.66 yesterday. Overnight high traded was 94.058. Immediate resistance lies at the 93.80-94.00 area. A sustained break above 94.00 could see 95.00/50. Immediate support can be found at 93.40 and then 93.00. A pullback could see us back to the low 93 regions, before higher again. Likely range today 93.40-94.00 range.
EUR/USD – reversed losses and rallied 0.18% to 1.1795 at the New York close. The EUR/USD fell to an overnight low of 1.17166, where there appeared to be solid buying interest. The bounce took us initially to 1.1750 and then 1.1770. Immediate support lies at the 1.1770 level. Overnight high traded was 1.17956. Immediate resistance can be found at 1.1800 and 1.1820. There is further resistance at 1.1850. The Italian situation remains a threat to the Euro. While the coalition settles to sort it’s policies out, that should give the Single currency some breathing space. Tomorrow sees crucial Euro area flash manufacturing and services PMI data. Expect consolidation with a likely range of 1.1760-1.1820 today. Look to sell rallies ideally to 1.1850/70.
AUD/USD – jumped like the proverbial kangaroo to a high of 0.75864 overnight. The Aussie, as it has done countless times, survived at it’s lowest point and jumped as the risk-on mode began. AUD/USD closed at 0.7585 (just at its highs) and looks poised for further short-term gains. Immediate resistance lies at 0.7600 and then 0.7620. Strong resistance can be found at 0.7650. Immediate support for the Aussie lies at 0.7550 and then 0.7530. Strong support can be found now at 0.7510. Likely range today 0.7550-0.7620. Look to buy dips for now.
USD/JPY – rose to an overnight high of 111.40 on a combination of risk-on and yield differential. USD/JPY eased to close in New York at 111.00, up 0.24% from yesterday. Any change in risk sentiment could see a pullback in USD/JPY to 110.60 and then 110.30. Immediate resistance lies at 111.30/40. Strong resistance can be found at 111.80/112.00. The Bank of Japan’s Core CPI data is released today and is forecast to ease a touch. Likely range today 110.60-111.30. Prefer to sell rallies.
GBP/USD – underperformed among the Majors to finish down 0.25% to 1.3435 (1.3470 yesterday). This was the lowest level for Sterling since December. Ever since the expectations of a BOE rate hike were quashed and the outlook for Brexit talks soured, the Pound has been in a one-way street lower. Overnight low traded was 1.33907. Immediate support can be found between 1.3390-1.3400 and expect that to hold unless we see further USD strength. Immediate resistance can be found at 1.3450 and then 1.3480. UK Public Sector Borrowing and the BOE Inflation Report Hearings result are out later today. Likely range today 1.3410-1.3480. Look to trade this range shag.
USD/ZAR – USD/ZAR Bearish signs are stacking up for South Africa’s rand. Volatility is rising and with it the cost of protecting against a weakening currency, short positioning is soaring and foreigners are fleeing South African bonds at a rate last seen 18 years ago.
After outperforming emerging-market peers for much of the year, the rand is falling into line as rising US Treasury yields spark dollar strength, damping demand for riskier assets.
The South African currency is down 5.6% against the dollar over the past month, and more pain is in store as the currency resumes its mantle as one of the most volatile in developing nations according to strategists at Nedbank Group.
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