- Press reports claim the UK cabinet had agreed to seeking to stay in the customs union with the EU beyond the two-year transition period
- After convincingly breaking above 3.0%, the US 10-year Treasury yield is continuing to probe higher
- The pressure on the Hong Kong dollar peg continues
- Last night, Brazil COPOM unexpectedly kept rates steady at 6.5%; Banco de Mexico is expected to keep rates steady at 7.5%
The dollar is mostly firmer against the majors as the rise in US rates resumes. Loonie and Aussie are outperforming, while the yen and Nokkie are underperforming. EM currencies are mostly weaker. IDR and MXN are outperforming, while TRY and ZAR are underperforming. MSCI Asia Pacific was down 0.2%, with the Nikkei rising 0.5%. MSCI EM is down 0.4% so far today, with the Shanghai Composite falling 0.5%. Euro Stoxx 600 is up 0.2% near midday, while S&P futures are pointing to a lower open. The 10-year US yield is up 1 bp at 3.10%. Commodity prices are mostly higher, with oil up 0.8%, copper up 0.1%, and gold down 0.2%.
The British pound rose a cent from yesterday’s lows on press reports that claimed the UK cabinet had agreed to seeking to stay in the customs union with the EU beyond the two-year transition period. The report suggested that the UK wanted to still negotiate other trade deals, which would seem to be a Trojan Horse. The UK’s other trade partners would have access to common market through the back door, if you will, without a treaty with the EU. EU officials seemed wary, but the report was denied.
Sterling has since returned to levels when the news first broke in early Asia, a little below $1.35. Sterling has spent the past two and a half weeks in a $1.3450-1.3620 trading range. It has not seen $1.36 this week. The sideways trading is alleviating the oversold technical condition.
After convincingly breaking above 3.0%, the US 10-year Treasury yield is continuing to probe higher. It is through 3.10% level now. In Q1, rising US yields were not sufficient to offset the upside pressure on the yen. Since then, the correlations have improved and the dollar has convincingly broken above the JPY110 level. The yen is off 3.3% over the past month. It is the weakest of the major currencies today, off about a quarter percent. The next target is seen near JPY111.20.
Rising US yields are serving to drag global yields higher. Core European bond yields are mostly up a couple of basis points, while the peripheral bonds bond yields are a couple of basis point softer. Italy is lagging, but its bond (and equity) market has stabilized after yesterday’s near panic reaction to a leaked document that played up the radical tendencies of what still could become the governing coalition. While progress is reportedly being made between the Five Star Movement and the (Northern) League, the failure to reach an agreement yet is frustrating and leaves open the possibility that it reflects the inability to reach a final deal. The most difficult issues are often left for last in such negotiations, and it may turn on who is going to be the prime minister.
The US granted the EU, Canada, and Mexico exemptions from the steel and aluminum tariffs until June 1. Japan, which was not granted sanctions, indicated today that it will notify the WTO of its retaliatory measures. Trade tensions are likely to rise ahead of month-end. Today is the deadline the Speaker of the House of Representatives (Ryan) set for a NAFTA deal if this Congress is to vote on it. We will be sharing observations of the implication of the passing the deadline, but for now, note that the Canadian dollar is the second strongest of the majors today, rising about 0.3%. The US dollar has returned to the week’s low which was sent on Monday near CAD1.2750. Nearby support is seen at CAD1.2730, while a break of CAD1.2700 would be seen as more significant from a technical perspective. The CAD1.27 level is where large options expire today ($1.3 bln) and tomorrow ($1.3 bln). The Mexican peso is also firm before the local market opens.
The Australian dollar is also holding on to small gains against the US dollar. Its nearly 0.2% gain puts it in third place today. The jobs data were mixed. The small outperformance in jobs creation in April was offset by the downward revision to the March series. Full-time employment though rose 32.7k, which is the most since last November. The participation rate ticked up, as did the unemployment rate (to 5.6%). The Australian dollar ran out of steam near $0.7550. There is an A$580 mln option struck at $0.7540 expires today, and an A$1.6 bln option expires at $0.7548 on Monday. The New Zealand budget did not deter the selling of the Kiwi on the cross against the Aussie. The Kiwi is trading at new four-month lows against the Australian dollar.
The euro is consolidating yesterday’s fall to new lows for the year. It continues to straddle the $1.18 area. There are no significant options the expire today, but tomorrow there is a 1.5 bln euro strike at $1.18 that will be cut. We had thought there was potential for the euro to test the 200-day moving average a little above $1.20 at the start of the week, but the pressure to cut back stale long exposure and for bottom pickers in the futures market to cut new longs proved too much. Now, even shallow euro bounces are being sold.
The pressure on the Hong Kong dollar peg continues. The HKMA reportedly bought HK$9.5 bln to defend the floor for the Hong Kong dollar today in a few operations. This is a sharp increase over what was spent yesterday (~HKD1.57 bln). The Malaysian ringgit extended its losing streak for a seventh session. The threat of official action gave the Turkish lira a brief reprieve yesterday. The currency is under pressure again today and is near the record low seen earlier this week (TRY4.5). More reports suggest US-based fund managers were larger buyers of both short and long-term debt sold by Argentina this week. The situation does not appear to have stabilized yet.
The US reports weekly jobless claims and the Philly Fed Survey for May. Investors will also be watching the oil market where Brent traded at $80 for the first time since November 2014 and WTI for June delivery is north of $72.
Last night, Brazil COPOM unexpectedly kept rates steady at 6.5%. A 25 bp cut was widely expected. IPCA inflation rose 2.8% y/y in April, near the cycle low and the bottom of the 2.5-6.5% target range. The central bank noted that while the inflation outlook remained favorable, the global outlook had become more challenging. This signals the end of the easing cycle, but many (including us) believe that COPOM had already cut too much already in light of growing political risk.
Banco de Mexico is expected to keep rates steady at 7.5%. CPI rose 4.6% y/y in April, the lowest since December 2016 but still above the 2-4% target range. With the peso remaining vulnerable, we expect a hawkish hold. Next policy meeting is June 21, the last one before the July elections. If peso weakness picks up ahead of the elections, then the central bank will likely respond with another rate hike.