Yen maintains a strong tone

Posted: 10th May 2019

Daily market report May 10th 2019

Market highlights

EUR/USD

The Euro dipped lower ahead of the New York open as markets tested the limits of recent ranges while the dollar maintained a firm overall tone amid an element of defensive demand for the US currency.

US jobless claims declined only slightly to 228,000 in the latest week from 230,000 previously while continuing claims increased slightly. Producer prices increased 0.2% for April with the year-on-year increase unchanged at 2.2% while core prices increased 2.4% over the year and marginally below consensus forecasts with little impact on interest rate expectations.

The March trade deficit was little changed at $50.0bn, although the US deficit with China did decline to a 3-year low and there was little overall impact from the data releases, although Friday’s CPI release could have a larger impact.

The dollar was unable to make further headway and dipped significantly towards the Euro close with position adjustment in evidence while commodity currencies attempted to rally. The Euro also gained some support from the strong current account position while the dollar was hampered by concerns over the risk of economic damage from higher tariffs. EUR/USD pushed to highs at 1.1250 before fading, although it held above the 1.1200 level.

Trade tensions dominated in early Europe on Friday with EUR/USD around 1.1220 as a lack of conviction over underlying trends for the pair persisted in nervous conditions. German trade data was slightly stronger than expected, but US-China tensions would still have a negative impact on the Euro-zone.

USD/JPY

US Treasuries continued to advance during Thursday with the 10-year yield sinking to below 2.44%, the lowest level for over 5 weeks. Risk appetite remained fragile which underpinned the yen amid further defensive demand for the Japanese currency and equities weakened further in early New York trading with S&P 500 index losses of over 1.0%. With the US currency under wider pressure, there was a slide to 3-month lows near 109.50 in USD/JPY.

Equities were able to stabilise later in New York trading which helped trigger a limited correction. Risk appetite also recovered gradually during Asian trading on Friday with speculation that the tariff increase would be postponed and USD/JPY tested the 110.00 area. Trade talks made little progress, however, and the planned increase in tariffs on Chinese imports to 25% was implemented ahead of the European open.

Equities retreated and the yen gained fresh support, although bilateral talks will continue on Friday which curbed selling to some extent on hopes that a deal could still be salvaged with dialogue between Trump and Chinese President Xi liable to be crucial. USD/JPY traded near 109.70 with choppy trading across asset classes and a firm yen tone.

Sterling

Bank of England member Saunders stated that the neutral interest rate for interest rates was likely to be around 2.0% and expected rates to rise over time, but increases wouldn’t be far or fast with the rhetoric in line with recent MPC commentary.

Sterling was hampered by comments from Labour leader Corbyn that the government had made no big offer on Brexit talks. The overall risk-averse tone also hampered the UK currency with markets fretting over the global trade and growth outlook. GBP/USD declined to 1.2970 before regaining the 1.3000 level as the dollar dipped while EUR/GBP peaked close to 0.8650.

The UK currency was unable to make headway on Friday as risk appetite dipped once again. Domestic data will gain at least temporary attention in Europe with the latest GDP and industrial production data, although risk conditions are likely to dominate during the day as a whole with GBP/USD trading around 1.3000 at the open as choppy trading persisted.

Swiss franc

The franc has struggled to gain sustained support from risk aversion during the past few days, but the currency did secure more notable backing during Thursday as confidence in trade talks and the global outlook deteriorated further.

EUR/CHF declined to lows near 1.1380 before stabilising while USD/CHF hit intra-day lows around 1.0125 and recoveries were held to the 1.0150 area. Trade tensions persisted in early Europe on Friday which limited selling on the Swiss franc, although the Euro and dollar were able to hold above Thursday’s lows.

AUD/USD + USD/CAD

The combination of a strong US dollar and weaker risk appetite continued to undermine the Australian dollar during Thursday with AUD/USD declining to lows around 0.6965. The US currency retreated later in New York and equity markets stabilised which allowed AUD/USD to recover to the 0.7000 area.

The Australian dollar initially made further headway in Asia on Friday, but momentum was capped by a relatively dovish Reserve Bank Monetary Policy Statement which reinforced expectations of a rate cut later in 2019.

The US decision to push ahead with the increase in tariffs on Chinese goods undermined risk appetite and pushed AUD/USD back just below 0.7000 in nervy conditions.

The Canadian March trade deficit narrowed only slightly to C$3.2bn from C$3.4bn the previous month, although both imports and exports strengthened on the month.

The Canadian dollar lost ground as oil prices weakened and global trade fears increased with USD/CAD testing resistance above 1.3500. There was, however, selling interest on rallies and USD/CAD retreated to near 1.3450 as risk conditions recovered.

The pair traded around 1.3470 on Friday as risk appetite dipped again, although oil prices held firm which provided support ahead of domestic employment data later in the day.

NOK+ SEK

The Norges Bank held interest rates at 1.0% following the latest policy meeting, in line with consensus forecasts.

According to the statement, the overall outlook for the policy rate was little changed from the March report with capacity utilisation rising broadly as expected and inflation slightly higher than projected.

Although uncertainty surrounding global developments persisted, the most likely outcome was a further interest rate increase in June.

The krone spiked stronger immediately after the decision, although there was choppy trading and the currency dipped sharply later in the session as risk appetite deteriorated again. EUR/NOK moved above 9.85 and the krone dipped again at the Friday open on trade tensions.

Norway’s headline CPI inflation rate held at 2.9% for April compared with consensus forecasts of a decline to 2.8% while the core rate declined less than expected to 2.6% from 2.7%.

The data increased confidence in a June rate hike, but krone gains were limited with EUR/NOK around 9.85 with USD/NOK around 8.77.

Fears over the global trade outlook continued to undermine the Swedish krona. EUR/SEK pushed to fresh 9-year highs above 10.83 with no recovery on Friday as risk conditions continued to dominate with USD/SEK around 9.65.

Equities

Euro-zone equities came under sustained pressure during Thursday as risk conditions deteriorated further. Trade fears increased and markets also fretted over underlying weakness in the Euro-zone economy.

The German DAX index declined 1.7% on the day with losses of 1.8% and 1.9% respectively for the Italian FTSE MIB and French CAC indices respectively.

Weak risk appetite undermined UK stocks, although there was a recovery from lows with the FTSE 100 index declining 0.85%.

Trade tensions dominated Wall Street with only a marginal impact from the data. There was a recovery from intra-day lows with a 0.3% decline in the S&P 500 index.  Futures, however, declined again as the tariffs on China went into effect.

Trading conditions were inevitably volatile in Asia as trade issues dominated.

Net gains were reversed after the tariff increases went into effect, but bourses then rallied sharply into the close.

Japan’s Nikkei 225 index still declined 0.25% as a strong yen undermined support while the Australian ASX index gained 0.25% on hopes for Reserve Bank easing later this year.

Chinese equities briefly dipped into negative territory, but the Shanghai index recovered strongly in late trading with a gain of over 3% with Hong Kong’s Hang Seng index 1.3% higher.

Commodities

Oil prices retreated during Thursday as fears over the global trade outlook and weak risk appetite undermined crude support, especially given concerns that demand could falter if trade wars escalate.

WTI dipped to lows near $61.0 p/b before rallying as equity markets stabilised. There was also underlying support from Iran tensions.

WTI traded around $62.10 p/b on Friday with Brent around $70.80 p/b in choppy conditions.

Gold drew only limited support from weaker equity markets, but there was support below $1,280 per ounce and prices recovered ground as the US dollar retreated.

Trade concerns did provide an element of support with gold just above $1,285 per ounce on Friday. Silver struggled to make headway given global growth fears and traded around $14.80 per ounce.

Cryptocurrencies

Cryptocurrency sentiment again held firm on Thursday with further buying interest on dips even with volatile trading across all asset classes.

Prices were resilient even with the vulnerable tone in global risk appetite. In this context, there was some support from cryptocurrencies being potentially seen as a defensive asset and an alternative to equities.

Buying support continued in Asia with bitcoin posting 6-month highs near $6300.

Ether was again more subdued and traded around $170 on Thursday before gains to above $175 on Friday amid the bitcoin gains.

Calendar

Major events for the day ahead: (times in BST)

09.30: UK GDP (Q1 first estimate)

09.30: UK industrial production

13.30: US Consumer prices

13.30: Canada labour-market data