Markets finally have something else to focus on as US Treasuries continue to rally. Monday saw the US 10yr Yield hit its highest level in 9 years.
The return of Chinese markets after the Golden Week holiday will set the tone for the trading week, despite the US, Canadian and Japanese holidays on Monday. The ongoing US-China trade conflict will add to the fact that Chinese markets will have to play catch up to last week’s turmoil in global markets on the back of US bond yield rising to its highest level since 2011.
Markets have been fixated on trade for the last three months but it now seems that focus is shifting to the bond story as the breakout in yields, which move inversely to prices, looks like its holding. If the yield curve in the US starts to stabilise that could put a cap on the US dollar strength.
In terms of the domestic data in the US its looking a little quiet this week after fireworks of last Friday’s jobs report. We have to wait until Thursday for our first big reading, with CPI inflation data due for release, followed by import and export prices on Friday.
For the Euro the continued noise around the Italian budget continues to keep the currency in check. The dispute between the new Italian coalition government and the EU has so far been about aggressive rhetoric, with the Italians stating that they would not move at all on the final budget numbers, this doesn’t mean that they won’t move so we could expect a deal at some point before the end of the year. Deal or no deal the budget is acting as a headwind in the face of any Euro gains at the moment.
It’s quiet on the data front for overall Eurozone readings but we do have local inflation numbers from France, Spain and Germany. Germany will be further in focus after Monday’s trade data showed a sharp fall in imports, pushing Germany’s trade surplus up to 18.3bn from 15.8bn. Imports came in well below the last months +2.8% at -2.7%.
There is a sense of relief that Sterling managed to safely navigate its way through last week’s Tory Party Conference without much more than a brief dip. Prime Minister Theresa May’s performance in her key note speech was better than her dancing on to the stage to leave government supporters happy, worked to keep the wolves at bay, for now.
Focus now shifts to Brexit, and getting a deal on the Irish border backstop before next week’s EU summit. Rumours that both sides are willing to concede on issues around the Irish border have lifted the pound on hopes that a deal will be done. The issue remains whether a majority of UK MP’s will vote for the new Ireland solution, something that still has the power to stop everything in its tracks.
The domestic calendar is busy this week for the UK with the new monthly GDP reading on Wednesday as well as industrial production readings, as well as more trade balance numbers.
The positivity surrounding the new USMCA trade deal in North America has been short lived, as oil market chatter and volatility at these elevated prices started to have an effect on the Loonie. After a holiday on Monday Canadian Dollar pairs remain under pressure, especially after a mixed jobs report last Friday as employment growth was offset by weaker than expected wage data.
There is a lack of domestic data in Canada this week, which leaves us a little nervous around the prospects of a rate hike later in the month. Probability is up at 89% for a hike in rates at the next Bank of Canada meeting, but with the uncertainty in oil markets at the moment its worth being cautious around this.
There is a perfect storm of issues for the Aussie Dollar as the new week begins. The weakness of the Yuan, lower industrial commodity prices and rising US yields are all adding to the ongoing trade conflict between the US and China to cause the extended downside in Australian Dollar pairs. The start of the week shows no sign of any of those issues going away, which means the likes of AUDUSD, EURAUD and AUDJPY have all seen their fair share of big moves.
The rising US bond yields are also concerning such is the Aussie reliance on the Greenback, so a softening of the yield curve this week would be welcomed by those with Australian Dollar risk. Despite the downside in the currency of late we have actually seen some positive domestic data, with retail sales and PMI readings beating expectations. However, the currency needs more if it is to battle through the strong headwinds.
The rout in developed bond markets has led to the Kiwi Dollar being left unprotected as the currency fell massively against the US dollar last week. The lack of domestic data this week’s means that we are at risk yet again this week as the rising US bond yields look like they are sticking at their new highs. Business confidence numbers could be the only saving grace for the currency as we move through the week, with the RBNZ vocal of the need for improvement here before any meaningful shift in policy outlook.
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Investors continue to grapple with inflation concerns; Surprise API oil build comes at a critical juncture; Even the hard-to-love EUR is trading higher