Breaking News
Get Actionable Insights with InvestingPro+: Start 7 Day FREE Trial Register here
Investing Pro 0
Ad-Free Version. Upgrade your experience. Save up to 40% More details

Pound And Loonie Rise Against USD On Interest Rate Expectations

By Marc ChandlerMarket OverviewSep 28, 2017 06:05AM ET
Pound And Loonie Rise Against USD On Interest Rate Expectations
By Marc Chandler   |  Sep 28, 2017 06:05AM ET
Saved. See Saved Items.
This article has already been saved in your Saved Items

The US dollar is consolidating inside yesterday's ranges against the euro and yen while extending its gains against sterling and the dollar-bloc currencies. The sell-off in the US debt market continues to drag global yields higher. The 10-Year Treasury yield reached 2.01% on September 8 and now, nearly three weeks later, is near 2.35%. It had finished last week at 2.25%. With today's three basis point increase, the 10-year yield is above the 200-day moving average.

The German 10-Year Bund yield moved above 50 bp today for the first time since early August. In early September, it reached a low near 29 bp. The US premium reached 1.88% today, the most since July. The two-year premium reached almost 2.2% earlier today, its largest since March.

The US 10-year premium over Japan has risen sharply as well. It bottomed on September 7 just below 2.03%. It tested 2.30% today, moving above its 200-day moving average (~2.26%) for the first time since mid-July.

There are only two major currencies that have appreciated against the dollar over past month, sterling and the Canadian dollar. The gains in both can also be traced to interest rate expectations. The market has moved to discount a strong chance of a BOE hike as early as the November 2 meeting (~75% chance). The two-year Gilt yield has risen nearly 30 bp over the past month, nearly twice the increase of the US two-year Treasury yield. The yield on the 10-year Gilt is up 35 bp, again nearly twice as much as the US increase.

Canada is a similar story. Its 10-Year yield is up 27 bp, and the two-year yield is up 31 bp. Over the past two weeks, first the deputies and yesterday the Governor seemed to signal to the market that it will not likely raise rates next month, as some had thought likely given the continued strength of Canadian real sector data.

The immediate focus is on inflation reports. Spain and German states have reported a mixed bag ahead of tomorrow's preliminary regional estimate. Spain's harmonized measure rose 0.6% in September, which is a touch less than expected, and due to the base effect, the year-over-year pace ticked down to 1.9% from 2.0%. Five German states reported inflation figures today. The year-over-year rates increased in two states, fell in one state, and was unchanged in the remaining two. The composite will be reported shortly and is expected to tick up to 1.9% from 1.8%.

The eurozone preliminary September CPI is expected to have increased to 1.6% from 1.5%, mostly due to energy costs. The core rate is expected to be unchanged at 1.2%, for the third month. It is most unlikely to change Draghi's assessment that continued substantial monetary accommodation is necessary.

Japan will report August inflation figures tomorrow. The headline rate is expected to rise to 0.6% from 0.4%. It would be the highest in two years. The core rate, which excludes fresh food is expected to accelerate to 0.7% from 0.5%. This would also be the highest reading in two years. The measure that excludes fresh food and energy belies the challenge. It is expected to edge higher from 0.1% in July. It would match the fastest pace reported this year (January).

The US reports a revised estimate for Q2 GDP today alongside trade and inventory data that will help shape expectations for Q3 GDP. Weekly initial jobless claims too will be reported, but the disruption caused by the storms has not completely washed out. Tomorrow, the US reports personal income and consumption data, which includes the core PCE deflator. The core deflator is expected to have risen 0.2% in August, the most since January. However, the year-over-year rate may stabilize after falling in five of the first seven months of the year.

There are a couple of other developments to note. First, the Reserve Bank of New Zealand left rates on hold as widely expected. It did not shed fresh light on the course of policy but signaled no hurry whatsoever. It was cautious on growth and expected inflation to soften. From a technical point of view, we still like the Kiwi against the Aussie. We anticipated an Aussie bounce at the start of the week but saw that as a selling opportunity. Today, the cross returned to nearly the low of the week. We suspect there is room for the cross to drop another 1-2% in the coming weeks.

Second, reports suggest that the EC could make a small gesture toward the UK on Brexit and that is to change the negotiators' mandate to also include a transition period. The EU Parliament is already reportedly drafting a motion that could be voted on next week. One of the issues with that is what is the status of the European Court of Justice during the transition. Earlier this week, UK's Davis argued against its jurisdiction during the transition, but of course, the EC will insist on it.

There is a large BOE conference today as it celebrates its 20-years of independence. The conference is well underway, and it poses some headline risk, but this is not the venue for new policy announcements or hints. Three Fed officials are speaking today as well. We have already heard from Atlanta's Bostic, and George heads up the hawkish wing of the Fed (we suspect she was the dot plot that thought two rates hikes this year would be appropriate, meaning she thinks the Fed is already slipping behind the curve). That leaves the outgoing Vice Chairman Fischer who is speaking at the BOE conference that may be the most interesting of Fed speakers today.

The euro is trading inside yesterday's ranges. Yesterday's high was just shy of $1.18. A move above there could see gains toward $1.1830. We'll be watching the price action to see if the market's bias has shifted from buying euro dips to selling into rallies. Between $1.1750 and $1.1755 today there are 1.6 bln euro options set to expire. The firmer US rates are not lifting the greenback against the yen today. It was turned back from yesterday's highs near JPY113.20. Initial support is pegged in the JPY112.40-JPY112.60 area.

Sterling is slipping lower after closing below $1.34 yesterday.At $1.3350 it retraced 61.8% of its BOE-spurred rally. Additional support is seen near the 20-day moving average that is found near $1.3310. After selling off hard yesterday as Bank of Canada, Governor Poloz confirmed not set the course of Canadian rates and sounded a bit cautious. The US dollar rose above CAD1.25 today for the first time this month and was turned back amid the dollar's general consolidative tone. The CAD1.2430-CAD1.2450 may offer initial support.

After filling a gap from September 12 on Monday and consolidating Tuesday, the S&P 500 rose to a new record of 2511.75 yesterday. It was not sufficient to lift Asian shares, where the MSCI Asia Pacific fell for the sixth consecutive session, and this is even with the bounce back in Japanese stocks after yesterday's ex-dividend dip. The MSCI Emerging Markets Index is off 0.6% a, and it is has fallen for the sixth session. European shares are faring better, and the STOXX 600 is edging higher, led by financials, industrials, and energy. Utilities and consumer sectors are drags.

Pound And Loonie Rise Against USD On Interest Rate Expectations

Related Articles

Pound And Loonie Rise Against USD On Interest Rate Expectations

Add a Comment

Comment Guidelines

We encourage you to use comments to engage with other users, share your perspective and ask questions of authors and each other. However, in order to maintain the high level of discourse we’ve all come to value and expect, please keep the following criteria in mind:  

  •            Enrich the conversation, don’t trash it.

  •           Stay focused and on track. Only post material that’s relevant to the topic being discussed. 

  •           Be respectful. Even negative opinions can be framed positively and diplomatically. Avoid profanity, slander or personal attacks directed at an author or another user. Racism, sexism and other forms of discrimination will not be tolerated.

  • Use standard writing style. Include punctuation and upper and lower cases. Comments that are written in all caps and contain excessive use of symbols will be removed.
  • NOTE: Spam and/or promotional messages and comments containing links will be removed. Phone numbers, email addresses, links to personal or business websites, Skype/Telegram/WhatsApp etc. addresses (including links to groups) will also be removed; self-promotional material or business-related solicitations or PR (ie, contact me for signals/advice etc.), and/or any other comment that contains personal contact specifcs or advertising will be removed as well. In addition, any of the above-mentioned violations may result in suspension of your account.
  • Doxxing. We do not allow any sharing of private or personal contact or other information about any individual or organization. This will result in immediate suspension of the commentor and his or her account.
  • Don’t monopolize the conversation. We appreciate passion and conviction, but we also strongly believe in giving everyone a chance to air their point of view. Therefore, in addition to civil interaction, we expect commenters to offer their opinions succinctly and thoughtfully, but not so repeatedly that others are annoyed or offended. If we receive complaints about individuals who take over a thread or forum, we reserve the right to ban them from the site, without recourse.
  • Only English comments will be allowed.

Perpetrators of spam or abuse will be deleted from the site and prohibited from future registration at’s discretion.

Write your thoughts here
Are you sure you want to delete this chart?
Post also to:
Replace the attached chart with a new chart ?
Your ability to comment is currently suspended due to negative user reports. Your status will be reviewed by our moderators.
Please wait a minute before you try to comment again.
Thanks for your comment. Please note that all comments are pending until approved by our moderators. It may therefore take some time before it appears on our website.
Are you sure you want to delete this chart?
Replace the attached chart with a new chart ?
Your ability to comment is currently suspended due to negative user reports. Your status will be reviewed by our moderators.
Please wait a minute before you try to comment again.
Add Chart to Comment
Confirm Block

Are you sure you want to block %USER_NAME%?

By doing so, you and %USER_NAME% will not be able to see any of each other's's posts.

%USER_NAME% was successfully added to your Block List

Since you’ve just unblocked this person, you must wait 48 hours before renewing the block.

Report this comment

I feel that this comment is:

Comment flagged

Thank You!

Your report has been sent to our moderators for review
Disclaimer: Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. All CFDs (stocks, indexes, futures) and Forex prices are not provided by exchanges but rather by market makers, and so prices may not be accurate and may differ from the actual market price, meaning prices are indicative and not appropriate for trading purposes. Therefore Fusion Media doesn`t bear any responsibility for any trading losses you might incur as a result of using this data.

Fusion Media or anyone involved with Fusion Media will not accept any liability for loss or damage as a result of reliance on the information including data, quotes, charts and buy/sell signals contained within this website. Please be fully informed regarding the risks and costs associated with trading the financial markets, it is one of the riskiest investment forms possible.
Continue with Google
Sign up with Email