An extremely active month ends as the dealing desk was abuzz digesting numerous conversations and themes. Currency markets were grappling with a sagging US dollar and falling US Treasury yields. While equity markets were a bit wobbly as oil prices remain slippery and investors are expressing concern that the market is looking a bit extended.
The US dollar continues to sour as the recent string of poor to middling US economic data weighs negatively on US rate hike expectations beyond June.
The ever-so-slight wobble in equity markets could be a sign that investors are growing more cautious about the US economy amidst external concerns around Chinese growth and eurozone stability.
While numerous currency subplots unfold, unquestionably the headliner is the Chinese yuan.
Chinese Yuan
The PBOC has let the yuan bulls loose in the China shop. Extremely hectic 24 hours on the CNH post after USDCNH toppled ten big figures. While some explanation behind the move can be offered up about funding cost impact, the weightiness of the move cannot be explained by funding alone and is probably linked to the start of an overall CNH and CNY policy shift.
Needless to say, the market is a tad shell-shocked this morning while searching for some policy clarity from the PBOC.
While there remains some politics in play after the Moody’s downgrade, with numerous projects recently tabled through the 'One Belt, One Road' initiative, the stronger yuan could be in China’s best interest to promote yuan internationalization and attract more investment.
On a fundamental basis, the PBOC’s shift in interest rate policy could be adjusting investor expectations. While the PBOC rate hikes were interpreted as in lock-step with the Federal Reserve Board tightening, beyond June, the Fed interest rate view remains extremely clouded, so the shifting differentials will most certainly ease capital outflows and lessen domestic demand for the US dollar.
The USDCNH collapses 250 pips after a stronger than expected fix, likely driven by 3-day Tom next trading above 100 pips per day.
Euro
Despite the mixed headlines, negative EUR inflation data, and a very cautious sounding Draghi, the EURUSD powered higher overnight as investors become more convinced the ECB will signal a shift in forward guidance. It was all aboard the Euro Express as fear of missing the boat mentality on changing ECB policy is far too beguiling for traders to pass up. While yesterday’s Reuters “sources” article stoked the euro bulls fire, investors went all in after ECB member Weidmann affirmed the market's ECB view.
Australian Dollar
Soft commodity prices continue to undermine the Aussie dollar which is struggling for momentum despite broader USD weakness. Iron ore prices remain at the heart of the matter amidst China growth concerns. But sliding oil prices have compounded the view putting pressure on all commodity-linked currencies.
China concerns are mounting despite the beat on Tuesday's PMI as the actual impact of higher funding costs have yet to be realized in the manufacturing and service sector.
The Aussie appears to be hanging on by a thread, and if weren’t for the dwindling Fed rate hike expectation beyond June, the Aussie could be trading well below the .7400 handle.
Oil remains on a very slippery slope as traders continue to hammer prices lower in total defiance to OPEC production cuts. Speculators will continue to throw down the gauntlet amid concerns about the growing supply glut, more so as US rigs continue to ramp up production.
API reported a draw of 8.67 million barrels of US crude oil and coming at a timely reprieve for prices. But given the market’s current resolve it’s more likely the knee-jerk is faded rather than extended as conversation around oil remains very bearish.
While external drivers should remain dominant, this morning CapEx and Retail Sales data could produce a limited rise, but the tail risk is most certainly for weaker prints with the Aussie precariously perched at .7425.
Post Data
AUD has moved up reacting to a good retail sales data and a decent looking CAPEX number. Level now 0.7440 from around 0.7427 going into the data but was smacked mercilessly after the China May Caixin Manufacturing PMI entered the dreaded contraction zone for the fist time in 11 months—49.6 versus 50.1 expected. Things are looking very soggy for the Aussie this morning.
