Forex today: tradewar angst and fear of higher rates in US still linger
Numerous headlines and comments related to the US’s latest stance on trade flowed but risk was somewhat of an improvement as we head towards the end of the week in Asia while traders and investors overnight showed mixed sentiment in respect to the impact of Cohn resignation and what it means for Trump's intentions for steel and aluminium tariffs on imports and tax reform in the US.
The US dollar traded better bid due to Fed's Brainard turning more hawkish and less dovish seeing economic headwinds turning to a tailwind and saying that a faster path of rate hikes may be appropriately raising the probability of change in the dot plot later this month.
DXY traded between a day's range of 89.407 - 89.779 while the US 10yr treasury yield, which fell 4bp to 2.84% in response to the Cohn resignation and assorted trade tensions, chopped back to 2.88% in the NY afternoon, while 2yr yields remained locked inside a 2.22%-2.26% range, as explained by analyst at Westpac noting that Fed's Beige Book of regional anecdotes showed increased upward pressure on wages in recent weeks. Fed fund futures continued to price three more hikes by end-2018 (with March highly likely), and another in 2019.
As for other Central Banks, the BOC held rate while trade developments are creating uncertainties which sent the loonie lower across the board and USD/CAD up to a new closing high, the highest since last July testing 1.3000.
As for the other currencies, euro traders are awaiting the ECB tomorrow for policy guidance, (possible removal of QE flexibility language), while elsewhere, the nonfarm payrolls are just around the corner elsewhere. The ADP report was positive in that regard as a potential prelude to the government numbers and helped the dollar bounce, keeping the EUR/USD bulls in check to below the 1.24 handle after opening around the European's high of 1.2447. However, EUR/JPY got a lift as risk picked up allowing for EUR/USD to get through 1.2420 before further dollar gains, a drop to 1.2380 and headed in for a close of 1.2410.
Anchored by Brexit angst, GBP/USD dropped in the European markets with risk-off sentiment the driving force on the back of Cohn's resignation. The bulls protected the 1.3850 regions and managed to squeeze out an NY close of 1.3886 within a range of 1.3901 and 1.3854 for the session.
EUR/GBP was buoyed by the lingering Brexit against and a more positive backdrop in German politics/government while the initial concerns over the hung parliament and populist show in the Italian elections were shrugged off. EUR/GBP rose to a 14-week high of 0.8968 during the European session before a sell-off to 0.8919 during the NY morning ending in a sideways drift at 0.8926.
USD/JPY has been recovering from the risk off flows post the resignation announcement from Cohn yesterday when the yen rallied from 106.21 to 105.45.
It was a choppy session in London while in NY, the move was pretty convincing and the bears stepped out of the way for the most part (USD rretaces most of the 60 pips loss vs Yen), while at the same time, the bulls are by no stretch of the imagination finding their way out of the woods just yet - there is still plenty of angst over a number of geopolitical circumstances and US inflation/Fed rate hike risks (bad for stocks) that favours a bid in the yen, (struggles with resistance on the 106 level time and time again). The BoJ announcements will be a key event as will the nonfarm payrolls on Friday.
As for the higher betas, there was some stability in this fraction of the marketplace as fears of a trade war abated to some extent on opposition to such reforms within the Republicans and from key officials trying to back peddle, in part, some of the damage already done on a geopolitical front and within financial market's confidence. Gold was lower while AUD/USD found an early lift on improved risk sentiment and a spike in AUD/JPY although met sellers at 0.7830 with a slide on stock prices for a close around 0.78 the figure as traders await Chinese/Aussie trade data in the Asian session.
Key-notes from US session:
Funda and political wrap: Trump expected to sign steel and aluminium tariffs Thursday
Key events ahead:
Analysts at Westpac sight the key risk events ahead as follows:
"Australia’s busy data week concludes with Jan international trade at 11:30amSyd. Dec produced a hefty -$A1.4bn deficit, nowhere near consensus for a $0.2bn surplus, due to a stunning 6% surge in imports. We look for this import spike to have unwound in Jan, while exports may have edged up a touch. This would produce a surplus around A$0.6bn. Consensus is $0.2bn.
China Feb trade data (any time after 1pm Syd/10am local) should show the usual volatility driven by the shifting timing of the lunar new year holidays. There were only 15 official business days in China in February, versus 18 a year earlier. Consensus is for the $20bn trade surplus in January to swing to a deficit around -$6bn in Feb. It seems prudent to average the 2 months.
The ECB policy meeting dominates Europe’s calendar. A steady hand on key interest rates and asset purchases ($30bn per month until September) is fully expected. The market focus is instead on the quarterly staff forecasts and President Draghi’s press conference. The euro is often very skittish around ECB meetings."